How to Get a Mortgage for a Rental Property?

Real estate investment is one of the more popular and profitable areas for investment. Still, but if not structured right, this can be a risky investment—including property loans.

A mortgage for a rental property is significantly different than that of a mortgage for a primary residence. However, that does not mean it should be challenging to take out a mortgage for your rental property. First, let’s cover some basics.

What Makes a Mortgage for a Rental Property Different from a Primary Residence?

A rental property is very similar to an owner-occupied home, with the exception it takes into account the potential rental income the property will generate. The process works this way because, most likely, owners do not continue living in the home. Due to this, rental properties are seen as more risk than homestead single-family properties. This is why rental properties have larger down payments and higher mortgage rates.

The down payment for a rental property is typically higher than one for homestead property. It is almost always 20% or higher. Additionally, since there is some risk to rental property investment, there may be a higher interest—however, current interest range between 5%-7%.

Reminders and Quick Tips Before Taking Out a Rental Property Mortgage

Good Credit Score

As with most leveraged investments taking out a loan for a rental property requires a decent credit score. If you do not have a good score, a lender will not preapprove you unless you are working with an asset-based lender in which you can expect to pay a much higher interest rate. Therefore, to get the based rate possible for a rental loan, you should aim for a credit score of at least 660.

More Loans Mean More Stringent Requirements

If you have multiple loans, a new investor may be wearier to supply you with another loan. Therefore, if you already have loans, you may need a higher credit score than usual to qualify for a mortgage.

Have Your Proof of Income Ready

Credit score will play a significant role in whether or not you can get a rental loan, but so does your W2 or business income. Many lenders require W2s from the last two years to verify your income. Typically, if you have a source of income and can pay for the mortgage rates, it’s easier to get qualified.

Self-employed people must supply two years’ worth of tax returns and a profit and loss statement that is the most up-to-date. Ultimately, the lender will evaluate the profitability of the deal, but that also includes the history of the lendee. To increase your chances of approval, you will need to have documentation that shows your income related to your reliability. Keep in mind; many lenders do not require income verification – especially private money lenders.

Be Sure to Have Cash

Regardless of which lender you go with, having cash on hand is a must. An investor typically needs to have cash reserves for six months in addition to a down payment. Because of this, you should have the total amount of money in your bank account that equals your cost for all your loans for six months.

How to Get a Mortgage Skillfully for a Rental Property

#1 Set a Budget

First thing’s first—you need to set a budget. Any wise investment or loan begins with a budget. Consider both the recurring and ongoing costs as all costs, whether small or large, add up and impact your bottom.

Some of the upfront costs include the loan, down payment, possible maintenance, rehab, and closing costs. As for recurring expenses, these generally include property taxes, repairs, insurance management fees, and vacancies.

Once the budget is set, you can make better decisions about what kind of loan to get and even what type of property to invest in.


#2 Find the Right Property

The strategy of your rental property portfolio determines your mortgage rates and profitability. For that, finding the right property is essential. Investors should pay close attention to the location and how the area attracts locals and visitors. Location plays a significant role in vacancies, which is a substantial hidden cost that all investors should keep track of. It is as important as setting the correct rent payment. You should be on the lookout for items that could raise the price just a bit more, just as you should be on the watch of things in the neighborhood that could drive people away.

Your property should also be well kept enough so you can charge reasonable rates and make a profit. Remember—fixer-uppers require a more significant investment than a move-in-ready property.

It is also good to look at taxes since they are long-term expenses that remain with the property. Many websites search for properties, but you may want to check Roofstock for income-producing properties.

#3 Find a Suitable Lender

It is important to note that while many private rental loan programs are available, each lender will have its preferences. Some lend may only lend in certain states, and some may have minimum loan amounts. Nevertheless, JaScott is an excellent resource for your real estate loan needs, and we have lots of experience finding the best financing options for real estate investors; and we can loan in all 50 states. Feel free to contact us at JaScott if you have questions about any of our programs.

#4 Decide Which Type of Mortgage You Want

There are many types of loans to choose from for your rental property. A conventional loan has stringent requirements (in terms of credit, income, etc.) and can take 4-8 weeks to close. However, it does offer the benefit of a lower down payment.

An FHA loan, which the Federal Housing Association backs, can be used on a property with up to four units, but only if the owner occupies at least one. Another positive item about this method is the minimum credit score required is 580, and your down payment is 3.5 percent. If you can pay 10 percent upfront, then your credit score can be as low as 500.

Typically, most real estate investors choose to work with private lenders due to their ability to move fast to secure a profitable deal.

#5 Consider Insurance and Set Your Rent

To successfully pay your mortgage, you must consider the long-term payments—including insurance and how much your rent costs. Landlord insurance is always a great idea, and it is a requirement when you rent out a property for longer than six months.

Setting your rent determines how successfully you pay back your mortgage. Rent should at least cover the property taxes, insurance, interest, and principal.

In Summary

JaScott can help you achieve your rental property goals with a reliable loan. Not all properties are the same, and we can help give you the funds you need. Contact us today and discover the following steps!

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