It is possible to get a loan for a rental property. Approval depends on your credit, income, down payment amount, and the type of mortgage you are applying for, among other factors.
The risk for the lender is usually higher for a mortgage on a rental property than a primary residence where the borrower lives. Because of this, the qualifications for a mortgage loan can be more stringent.
Types of Loans for Rental Properties
There are several types of loans for rental properties. The type of loan that will work best for each situation will vary, but some options include:
Conventional Bank Loan
A conventional loan is the most common type of mortgage. It is issued through a private lender. The loan needs to conform to the guidelines set by Fannie Mae and Freddie Mac for loan maximums, credit score, and down payment amount, among others.
For instance, in 2021 the loan maximum for a conventional loan ranges from $548,250 to $822,375, depending on the area. If a loan falls outside of these parameters, it does not fit within the scope of a conventional loan.
While the qualifications may vary by lender, the following seem to be the most common:
- Credit score of at least 620.
- A down payment of 20% of the loan amount.
- A clean credit history with no bankruptcies or defaults on loans.
- Maximum debt-to-income ratio of 45%.
If you are getting a loan for a second home that you only rent out some of the time, the qualifications might not be as strict because it isn’t a true rental property. On the other hand, if you have more than four mortgages, the qualifications get even more stringent to evaluate your finances.
Using Your Home Equity
If you have equity in your primary residence, you might be able to take out a Home Equity Line of Credit (HELOC) or cash-out refinance to obtain funds to buy a rental property.
HELOC - a HELOC is when you obtain a second loan in addition to your current mortgage that taps into the equity in your home. In some cases these funds can be used to fund the purchase of a rental property.
Cash-out refinance - this is when you replace your current mortgage with a new loan. The amount will be higher than your current mortgage to reflect the amount of equity you are drawing cash from.
Both of these methods might be beneficial because you can access money with lower interest rates than other types of loans. There are also usually little to no closing costs, and so you can potentially buy a rental property with a low amount of cash out of pocket.
Private Money Loan
Funds obtained through a private money loan come from a private lender as opposed to an institutional lender used in a conventional mortgage. The qualifications are usually similar to a conventional loan. However, with a private money loan, there might be more flexibility with how you can use the funds to purchase a rental property.
Because there are fewer government regulations, it is important to vet a private money lender before obtaining a loan to make sure they are in good standing and have stability.
The type of loan that will work best for your rental property investment depends on many factors like your credit score, funds for down payment, and the property you are investing in. To learn more about the process, it is best to meet with a real estate attorney or a financial advisor well versed in real estate investments.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.
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