As a newbie real estate investor, purchasing your first rental property is a significant step forward. Aside from selecting a potentially lucrative investment, you must also figure out how to finance your rental property. Let's look at the differences between a primary home mortgage and a rental property mortgage before we discuss how to apply for an investment loan.
The Difference Between a Mortgage for a Primary Home and a Rental
The mortgage application process is the same whether you're looking to buy a home or an investment property. But, there are different standards that lenders follow for approving loans on rental properties.
Larger Down Payments
For a primary home, you can make as little as a 3% down payment. For investment properties, the minimum down payment required ranges from 15% to 20%.
Keep in mind that since lenders are taking on more risk with rental properties, your mortgage rate will probably be slightly higher. As a general rule of thumb, the rate difference for an investment property compared to a primary home loan usually falls between 0.375 to 0.5 percentage points.
In some cases, you may be required to accept a shorter term than the typical 30-year mortgage duration offered for first home loans.
HOW TO APPLY FOR A RENTAL PROPERTY MORTGAGE
The application process for a rental property is the same as that of a home mortgage. Lenders will qualify the buyer, appraise the property, research the title and underwrite the loan in the same way they would for a primary residence. Lenders will demand a minimum credit score of 620 when financing a rental property. Your scores should be in the high 740s or higher if you want to get good rates. The DTI ratio should not exceed 35% to 45%.
Similar to the standards for a commercial borrower, the lender may demand financial statements for the previous three years as well as projections for the next year. You'll also need to submit current personal financial statements and tax returns of primary owners.
Ready to Invest in a Rental Property?
There are several benefits to being a landlord, but it's also critical that you have all of the information you'll need for success. Get in touch with one of our loan experts for customized advice and to be pre-approved for your loan right now.
Avance Group; Your Local Mortgage Broker
If you're thinking about purchasing a home in New Mexico, Avance Group is a local mortgage broker that can help you with your down payment assistance, home purchase, refinance, new construction, renovation, and more! Call us today at 817.524.6655 to get started!