Investors, especially those who do not have much experience of getting mortgages, often wonder how to qualify for an investment property mortgage. Although the process of getting qualified for a mortgage on investment properties not wholly different from conventional home loans, some investors consider it a little bit complex.
However, whenever you are applying for investment property mortgage loans, your lender will set a different standard for you. You have to maintain and follow specific rules and requirements to get qualified for a mortgage for an investment property, which makes the process complex for many. In this blog, we will highlight the simplest ways to get qualified for mortgages for your investment or rental property.
What Makes an Investment Property Mortgage Loan Different?
If you are an owner of an investment property, you might have gone through this process before. In Mortgage loans, you have to follow specific rules and guidelines when it comes to your credit score, the down payment and debt-to-income ratio. The lenders set these specific rules to manage risks associated with the process. Meaning, by placing these rules, the lender wants to make sure that you can repay the loan. When it comes to applying for a mortgage loan for an investment property, the conditions turn tougher.
Lenders become strict when they deal with the process of approving mortgages for an investment property. The simple reason behind this strictness it that an investment property is not the home for primary use and the borrower can easily walk away from it.
If you apply for a traditional mortgage loan, you can get qualified for it with as little as blow 5% down payment. When it comes to a mortgage loan application against an investment property, the borrower will have to pay at least a 20% down payment to get qualified.
One of the key reasons behind the stricter rules for investment property is that private mortgage insurance does not cover investment properties. Also, the rate of interest for mortgages for rental or investment properties is higher than conventional private mortgages for primary residences.
For example, if you are investing in a first house, where you will live full time, you can get more than $200,000 at a nearly 4.30% interest rate. When it comes to a mortgage for an investment property, you will get the same amount at almost 4.80% interest rates.
These are some key factors that distinguish mortgage loans for investment property from conventional loans. In the following part, we will focus on the ways to get prepared for mortgages for investment properties.
Ways to Qualify for Investment Property Mortgages
If you want to qualify for a mortgage for a first house, you have to come with at least a 620 credit score along with a 36%-45% debt-to-income ratio. Investors who apply for the mortgage for investment properties, on the other hand, are not fortunate enough. In the case of investment property, you have to impress the lenders with your income history.
Find a Flexible Lender
If you are preparing to get qualified for a mortgage for a rental property, think about long-term success. Remember, your journey does not end with mortgage approval. As an investor, you have to form a reliable team, where your lender will play an important part.
Whether you have approached mortgage brokers or traditional financial institutions, make sure the lenders understand your strategy and goals. Since the rules and regulations set for investment property mortgages are more stringent, it is better to approach lenders with adequate investment experience. Working with a seasoned agent or broker can also be beneficial for a beginner.
Be Aware of Your Credit Limits
When applying for investment property mortgages, you have to be aware of your credit limit. Although your credit limit to get qualified for the investment property mortgage can vary from one bank to another, an investor-friendly lender can help you to strategize your goal. They will advise you to follow the right approach to take advantage of the loan limit.
If you approach the large financial institutions, you can hardly nurture hope for getting qualified after overcoming your credit limit, as large banks may not show interest in your proposals. However, approaching experienced mortgage brokers can be an effective way for you.
Come with Better Credit Score if You Have Multiple Loans
Lenders become tougher for borrowers who have crossed their credit limits. For example, if the limit of loans is 10, and an applicant has already passed the threshold, he or she will have to show a better credit score. For example, mortgages, where the loan limit is 1-4, the applicants should come with at least 630 points.
Mortgages, where loan limit is 5-10, the applicants must come with at least 720 points as credit score. Hence, if you have too many loans, you will need a better credit score to qualify for private mortgages.
Your Work History can be a Game-Changer
This guideline is applicable for both investment property mortgages and traditional loans. Your lenders will ask you to submit the details of your work history. In this process, you have to show that your income is quite steady and you can repay the loan amount within the assured period.
In most cases, traditional banks want to see at least two years of income history before they decide to make the applicant eligible for the investment property mortgage. If you are associated with the same industry or business for the last two years, you can put some weight on your side.
Frequent job change or noticeable fluctuation in your income graph may harm your record. Also, if you are a self-employed person, you may have to show your tax returns for the last two years. Banks and mortgage brokers calculate the average income of an applicant in this way: if you have earned $50,000 in the year 2018 and $100,000 in 2019, the lender will consider the average annual income $75,000.
Come with Cash Reserves to Make the Process Easy
Cash reserves are one of the critical factors you have to keep in mind when applying for investment property mortgages. Apart from the down payment, the lender may ask you to deposit cash reserves for three to six months of loan payments for each property.
The number of months can go up if your lending profile is not so impressive. If the lender is not happy with your lending profile, you may have to come with cash reserves of at least one year. You can also request your mortgage brokers to calculate or estimate the monthly payment based on the total loan amount.
Do the Paperwork
Since you are going to apply for an investment property mortgage, you need to do some paperwork before approaching a lender. If you are going to apply for private mortgages for the very first time, it is better to visit one of the most trustable mortgage brokers, who have spent years and have a clear understanding of the landscape.
Hence, please manage time and sit down with an expert to discuss your financial situation, preferences and goals for mortgages. If the broker finds everything applicable and acceptable, he/she will give you a pre-approval and make you understand the further procedure.
The broker will also give you a near accurate estimate of the amount you have to pay per month as an instalment for your mortgage loan. Investment property mortgages are a long-term investment, and you have to follow and maintain some specific guidelines, terms, and conditions to get qualified for them. Compared to conventional mortgages for primary residences, rules and regulations for mortgage loans for investment properties are a little bit different. The number of credits you already have, and your income history is going to play a significant role in the process. If you want to know more about the process, guidelines, terms and conditions, consult a qualified lender or some experienced mortgage brokers to make everything clear.