The fear of being rejected for a rental property mortgage is a major reason why many people never step into the world of real estate investing.
It’s true that getting approved for and closing on a rental property mortgage won’t be a walk in the park for every real estate investor.
The best way to make the whole process of financing an investment property much easier is to educate yourself. Educate yourself about every aspect of a rental property mortgage that you can. In fact, it should be one of the first steps when it comes to real estate investing for beginners.
Get rid of that fear and avoid being rejected by learning all about how to get approved for a rental property mortgage right here, right now.
Rental Property Mortgage Checklist
What Does Your Credit Score Look Like?
Becoming a real estate investor relies heavily on your financial situation, naturally. In the eyes of a mortgage lender, your credit score is the first thing on the checklist of eligibility for a rental property mortgage. That three-digit number lets mortgage lenders know if you are the kind of real estate investor that can pay their debts.
The lower your credit score, the higher of a risk you pose for mortgage lenders, and the lower your chances of getting approved for an investment property loan. If by chance a real estate investor with a credit score on the low side is approved, he/she will have higher interest rates and possibly a shorter amortization schedule.
What is a Good Credit Score for Investment Property Loans?
So, what is a good credit score for financing an investment property? There are different types of rental property mortgages that require a different credit score and a “good credit score” can vary somewhat when it comes to different mortgage lenders. There still is, however, a minimum credit score when it comes to investment property loans: 620. Some mortgage lenders might accept a credit score lower than 600, but for a good rental property mortgage plan, a credit score of 660 and higher is preferable.
For the best financing, a credit score of 740 and over is required for a 20% down payment. If a real estate investor wishes to pay a lower down payment, a credit score of 760 will be needed.
How Can You Improve Your Credit Score?
If a soon-to-be real estate investor has a low credit score, all hope is not lost for getting a conventional loan. There are ways to improve your credit score so that, within time, you can get approved for a rental property mortgage. A few ways include:
- Check your credit report for errors or incomplete claims and have them removed
- Start paying your bills on time for months before looking into a rental property mortgage
- Start working on your credit utilization score
For more tips on how to improve your credit score, read: “How Can You Improve Your Credit Score for Financing Investment Properties?”
What About Your Debt-to-Income Ratio?
Debt-to-income ratio (DTI) is not often talked about, not nearly as much as credit score. However, it is just as important to a real estate investor looking to get approved for a rental property mortgage. Debt-to-income ratio is the percentage of your income that is used to pay off your debts. The debts include things like car loans, student loans, credit card debt, and any current property loans.
What is a Good DTI?
Opposite of the credit score, a lower debt-to-income ratio is actually better. The lower it is, the more likely mortgage lenders will approve you for a rental property mortgage. A good debt-to-income ratio is 36% or less.
One thing to keep in mind about what is a good DTI is your other monthly expenses (transportation, food, health insurance, etc.). Many times, these expenses aren’t included in a real estate investor’s DTI meaning that monthly mortgage payments may end up being too high along with other expenses. Set your budget before calculating DTI and take it into account before signing onto a rental property mortgage.
How Can You Improve Your DTI?
If your debt-to-income ratio is higher than 36%, start working on it before you apply for a rental property mortgage. Here is what you can do:
- Don’t take on any more debt
- Don’t make any large purchases with credit cards right before applying for a rental property mortgage
- Work on paying off your debt as much as you can
For both your credit score and DTI, know it will take time to make an improvement. Be patient and don’t rush to your mortgage lender until you have it all worked out. Consider consulting financial experts for help.
To learn about how we will help you make faster and smarter real estate investment decisions, click here.
Have the Cash?
A Cash Reserve
The whole point of a rental property mortgage is that you’re a real estate investor who needs cash, right? This is another point that gets real estate investors rejected for investment property loans. Know that most mortgage lenders will want to see that you have a 6-month cash reserve for each real estate property you own and wish to own (primary residence and rental properties).
This means that if you have a current mortgage on your primary residence with a monthly payment of $700 and a first estimate from the mortgage lender puts your rental property mortgage payments at $500 a month, you’ll need to have saved up $7,200.
The Down Payment + Other Fees
A typical down payment for a rental property mortgage is 20-25% of the price of the investment property. Certain mortgage plans allow for a lower down payment, like an owner-occupied mortgage or if you pay private mortgage insurance. It depends on your real estate investment strategy ultimately.
The down payment is not all a real estate investor has to plan for. When financing an investment property, you’ll be hit with a bunch of closing costs as well. On top of the recommended repair/renovation budget for real estate investing for beginners and the down payment, you’ll need at least 30-35% ready to go.
Closing costs add up. You need to learn all about them before applying for a rental property mortgage. Here are a few guides for real estate investors:
Investing in Real Estate: What Are Closing Costs?
What Are the Types of Closing Costs of Investing?
Shop Around for Mortgage Lenders
Once a real estate investor has a worthy credit score and cash saved up for a real estate investment, it’s time to shop around for mortgage lenders. The way real estate investing requires you to shop around for rental property, you have to shop around for mortgage lenders for similar reasons. Here’s why:
- Certain mortgage lenders will reject you, while others will approve.
- Depending on your credit score, you can get better investment property financing with different mortgage lenders.
- Some mortgage lenders include future rental income in your debt-to-income ratio while others won’t.
- You can negotiate closing costs to find which mortgage lender will save you more money.
- See which mortgage lenders are willing to offer you more investment property loans in the future (requires a higher credit score).
All of this will affect the return on investment for your real estate investment, so this step is important.
Visit a few local banks (direct lenders are preferred for real estate investors) and see what they have to offer you in terms of a rental property mortgage. The best tip for real estate investing for beginners here is to make sure the lender you work with has experience with investment property loans.
Know your investment property financing options: What Are Your Options for Financing Investment Properties?
Get Pre-approved for a Rental Property Mortgage
Now that you have a few mortgage lenders in mind, it’s time to get pre-approved. Why bother with this step? While it’s definitely not a guarantee that you’ll receive a rental property mortgage from the establishment, it still gives you a good idea of your eligibility. On top of that, real estate investors who are pre-approved show that they are serious to both real estate agents and sellers alike. So, don’t skip this stage.
Your mortgage lender will outline the exact paperwork you’ll need to provide for pre-approval. They will look at your credit report/history and likely ask for a bank statement, pay stubs/work history, as well as tax returns.
Once you are pre-approved, you’ll be given a pre-approval letter that outlines the amount you can receive, loan type, etc. Now you’re an investor ready to hit the real estate market!
How to Find a Rental Property That Mortgage Lenders Love
If you are following along with our ultimate guide for getting approved, by now you are worthy of mortgage lenders. But approval doesn’t start and end with the real estate investor. It starts with your credit-worthiness and ends with the evaluation of the real estate investment property. You need a rental property mortgage lenders will love.
Avoid rejection and use a rental property calculator to find investment property. You need an investment property that:
- Is in a real estate market with the potential for a high return on investment
- Has a good cash on cash return and cap rate for your real estate investment strategy of choice
- Provides enough rental income to pay off mortgage payments
- Brings a good return on investment with your unique rental property mortgage
The best way to find investment property with all of these traits is to use a rental property calculator. If a real estate investor shows up to a mortgage lender with anything less, rejection is highly likely.
If you’re thinking of turning the property you want to buy into a short term rental, use our Airbnb calculator to estimate its potential Airbnb rental income.
Get Moving on Your Rental Property Mortgage!
At this point, you’ll have what you need to get approved for a rental property mortgage. There will be a lot more paperwork required, but your loan officer is the best resource for that. Approach the mortgage lender with confidence once you follow all the tips in this guide! Soon, you’ll be a real estate investor making money and paying off your mortgage with rental income!
Don’t forget about Mashvisor’s role in getting approved for a rental property mortgage. Sign up for a 14-day free trial (with a 20% discount after) to use our rental property calculator and find an investment property mortgage lenders won’t think twice about approving!