A key to my investing strategy is buying long-term rentals with financing. In order to get financing you have to be able to qualify for a loan on an investment property. Qualifying for a loan on an investment property is similar to qualifying on an owner occupied home with some big differences. Many banks consider investor loans riskier than owner occupied loans. To learn more about my investing strategy including information on my rental properties check out my complete guide to investing in long-term rental properties.
Is it harder for investors to qualify for a loan?
With new lending regulations coming up every year it is a little harder for investors to get loans on properties. If you are an investor and want to get a loan on more than four or more than ten properties it really gets difficult. I have a great article here on how to get a loan on more than four properties here.
One of the biggest issues investors run into is they have to qualify for two houses if they have a loan on their personal residence. I think it is very important that people do not buy the most expensive house they can qualify for because of this. You must have a high enough income to debt ratio to qualify for a new loan whether it is as an owner occupant or investor. If you max out your qualification on your personal home, then it will be very difficult to qualify for a loan on an investment property.
Do banks require more money for an investment loan?
The simple answer is yes. Almost every bank will require at least 20% down on an investment property loan. Owner occupants can put no money down on a loan, but banks want investors to put more skin in the game. The origination fees, appraisal and other loan costs may be more expansive as well depending on what type of investment property you are buying.
Investors must also have more money in the bank than an owner occupant. Most banks will require at least 6 months in reserves for mortgage payments on all houses an investor owns or will own after the loan is complete. If you have a $1,000 mortgage payment on your personal residence and want to get a loan on an investment property that will have a $500 a month mortgage payment. You will need $9,000 in the bank on top of the money you need for the down payment and closing costs. I talk more about what costs are involved to buy a rental property here.
Does rental income count when qualifying for a loan?
The rules regarding rental income vary by the bank and type of loan. My portfolio lender has less strict guidelines than a bank that is going by Fannie Mae guidelines. Here are the Fannie Mae guidelines that most banks will abide by regarding rental property income and qualifying for a loan. Fannie Mae will require rental income to show up on your tax return before they allow you to use it to qualify for a loan.
My portfolio lender actually counts much more than the Fannie guidelines allow for as far a rental income. I have to provide leases to show the rental income or my tax returns to show the income coming in. If I don’t provide tax returns, then they do not count the full amount of the rental income.
Qualifying for more than four loans on a property
When you have four mortgages in your name, it gets much more difficult to get loans. Fannie guidelines are listed here, which include 25% down payments, 720 credit score and do not allow a cash out refinance. This is why it is so important to find a portfolio lender who does not follow Fannie guidelines! My lender will still do 80% loan to value loans on more than ten mortgages and allow a cash out refinance on more than ten mortgages as well!
It is definitely harder to get a loan as an investor than it is as an owner occupant. Planning is extremely important for an investor, especially when they have a large personal mortgage. If you max out your personal qualification then it will be very hard to qualify for an investor property. I would talk to a lender right away if you are interested in buying an investment property to see if you can qualify and if you can’t what you need to do.