Buying a rental property can be a very rewarding experience in your life. That’s because becoming a real estate investor can be a path to attaining financial freedom. However, when you want to buy a house for investment, you will need to meet some requirements, specifically if you plan on turning to a bank to finance your real estate investment. Acquiring mortgage loans can be a complicated process and some beginner real estate investors aren’t aware of the specific requirements to buy a house. In this article, we are going to go over the things you will need in order to buy a house for investment. If you want to buy a house for real estate investment, ensure you meet the following requirements:
1. A Decent Credit Score
A credit score refers to a numerical representation of your credit report. The FICO score, usually ranging from 300 to 850, will determine your creditworthiness. You will need to meet the minimum FICO score needed by your mortgage lender. There are some types of mortgage loans that allow for low FICO scores, such as FHA loans, which can be used for owner-occupied multi-family rental properties. However, your credit score will still need to be decent for you to qualify. It is recommended that you have a credit score of at least 620. You will get the best investment property mortgage rates if your credit score is good. This will enable you to save thousands of dollars yearly. If you have a credit score of below 580, you may need to work on improving it before you apply for a mortgage to ensure you meet the requirements to buy a house that your lender puts in place.
Related: How Can You Improve Your Credit Score for Financing Investment Properties?
2. A Pre-Approval Letter
A pre-approval letter is another example of the requirements to buy a house for investment. You will need to acquire one before you begin house hunting. A pre-approval letter shows that you have spoken to a mortgage lender, they have pulled a copy of your credit report, verified your income and employment documents, and determined that you qualify for a mortgage.
To be pre-approved, there are a number of documents that you will need to present to the loan officer. Some of the documents include tax returns for the last two years, W2 forms, bank statements, current pay stubs, a list of your debts, a list of your assets, etc. Most real estate agents will only start to show you investment properties for sale if you have a pre-approval letter. Furthermore, many property sellers will only accept an offer from a buyer if they are pre-approved for a mortgage. A pre-approval letter shows the seller that you are financially capable of purchasing the investment property.
3. Low Debt-to-Income Ratio
When you want to buy a house for investment, ensure that you have a low debt-to-income ratio of less than 41%. The DTI ratio is usually calculated by taking the total of your monthly debt payments (such as student loans, credit card payments, personal loans, and mortgage payments) and dividing it by your total monthly income before tax. It is used by lenders to determine if you can afford the residential real estate property.
For instance, if your total monthly income is $5,000 and your total monthly debt payments are $2,000, your DTI ratio is 40%. Most lenders will require a DTI ratio of 41% or lower for you to qualify for a loan. Some loans, like FHA loans, may allow for a higher DTI ratio.
Related: Debt to Income Ratio for a Mortgage: What Real Estate Investors Should Know
4. Sufficient Money Saved Up for the Down Payment
Having the minimum down payment for investment property saved up is also one of the important requirements to buy a house for investment. For conventional real estate investment loans, you will typically need a down payment of between 5% – 20%. How much you will need for a down payment will depend on the mortgage type you are seeking.
5. Ability to Pay Closing Costs
Apart from the mortgage payment, there are several other costs associated with buying a rental property. Having a budget for such costs is one of the requirements to buy a house that many first-time buyers fail to plan for. Closing costs will vary from state to state and from lender to lender. Some of these extra costs include home appraisal, property taxes, insurance, attorney/closing agent fees, underwriting fees, etc. Lenders can provide you with a comprehensive estimate of the costs you will incur on a particular loan.
6. A Knowledgeable Real Estate Agent
Having a knowledgeable real estate agent is also one of the requirements to buy a house for investment. You may think that by not hiring a buyer’s agent, you will be saving money. However, not working with a qualified real estate agent could cost you big time. A real estate agent will help you minimize errors you may make when buying a house to rent out. They have good knowledge of the investment property buying process and the real estate laws. A good realtor will also refer you to lenders and other real estate professionals.
You should hire your own real estate agent and never use the seller’s realtor. The seller’s agent works for the property seller and will have the seller’s interest in mind. To find a real estate agent, you can ask for recommendations from family or friends. You can also find them on websites like Mashvisor, Realtor, and Trulia.
Related: The Investor’s Guide to Housing Ratio
The Bottom Line
Before you consider investing in rental properties, you need to ensure that all the requirements to buy a house are in order. Acquiring investment property financing from mortgage lenders will only be possible if you meet these requirements. Be sure to check that you have all the above requirements before you start the process of buying an investment property.
Do you have all of the above requirements to buy a house for investment? Then click here to start looking for and analyzing the best investment properties in your city and neighborhood of choice.