Many lenders want to see higher credit scores, better debt-to-income ratios, and rock-solid documentation (W2s, paystubs and tax returns) to prove you’ve held the same job for two years. (This last requirement can make things difficult for retirees and the self-employed.)
Additionally, most will insist on a down payment of at least 20%, and many want you to have six months’ of cash (or near-cash) reserves available.
If you already have four mortgages, you’ll need some savvy to get a fifth. Most banks won’t issue new mortgages to investors who already have four, even when the loans will be insured by a government agency.
Although you might not qualify for a conventional mortgage, you might get one backed by the Federal Housing Administration (FHA) or Veterans Administration (VA). You could also opt for a hard money loan or a home equity line of credit (HELOC).
Some lenders won’t even care about your credit or employment history, as long as they see lots of potential profits in the investment property you’re considering.
Hard Money Loans
These loans are mostly used by house flippers and professional real estate investors. Also known as commercial real estate loans and “fix and flip” loans, they have three main advantages:
-
- Faster approval and funding . In some cases, loans will be approved on the same day the application is submitted, and funding can take as little as three days . Thanks to this speed, hard money loans are ideal for investors who want to buy a property fast – before the competition can scoop it up.
-
- Easier to qualify. If you make a down payment of 25% to 30%, have sufficient cash reserves and a good track record as a real estate investor, many lenders will overlook a subpar credit score. And they may not care that you already have 4+ mortgages.
- They are short-term loans . Most hard money loans have terms of 1-2 years or 3-5 years. For someone buying a rental property, this would be a deal killer. Few (sane) rental property buyers want to pay back the loan within a year or two. But for house flippers, these terms are perfect, which is fortunate, because there’s no such thing as a 12-month mortgage. Even if banks wrote short-term mortgages, most would never loan money for a property that needed significant repairs – one that might not qualify as inhabitable .
Other than the 25% to 30% equity requirement, the biggest downside of a hard money loan is the cost. Interest rates typically range from 9% to 14%, and many also carry upfront fees (in the form of “points”) of 2% to 4% of the total loan.
Conventional Mortgages
Compared to hard money loans, conventional mortgages are relatively cheap. However, they are more expensive than loans for owner-occupied properties. In general, you’ll probably pay a one-half to one percent higher interest rate for an investment property conventional mortgage.
Assuming you will not occupy a unit in the building, most banks will want to see the following to approve a mortgage for a rental property:
- A down payment of at least 20%. If you’d like a lower rate, make a 25%+ payday loans Mcminnville locations down payment. (On the plus side, there is no mortgage insurance when you put down 20% or more.)
- A credit score of 720 or higher. Scores below 720 won’t (necessarily) doom your application, but they will trigger higher interest rates, higher fees, and lower LTVs.
