If you are a diverse investor, real estate is an attractive asset. Unlike growth stocks, investment properties offer monthly income to investors. The first step to investing in cash generating properties is to purchase the property itself. Want to know how to secure funding? Here’s how to qualify for a loan on an investment property.
Investment vs. Owner-Occupied: What’s the Difference?
Owner-occupied mortgages and investment property mortgages are two very different things. The owner-occupied mortgage is for homeowners looking to live at their property and not generate cash flow from it. Investors purchase properties to generate income. Owner-occupied mortgages generally require a lower down payment and have a lower interest rate. Typically, owner-occupied mortgages are paid off over a longer period of time.
Debt to Income Ratio
Your debt-to-income ratio measures how the monthly debt payments you have compare to your monthly income. This way, lenders can see how much debt you are will be taking on. This is a metric they use to know if the property is affordable for you. Generally, debt-to-income ratio is calculated by dividing you total monthly debts by your gross monthly income. Be careful when taking out any new debts when you trying to qualify for a loan on an investment property, as any new debts will affect your debt-to-income ratio. Hold off on buying that new car if you plan to purchase an investment property. Some other things included in your debt-to-income ratio are you monthly credit cards, car loans, personal loans, student loans, and the mortgage you are trying to apply for. At the very minimum, your debt-to-income ratio needs to be 50%. It is suggested to keep your debt-to-income ratio below 36%.
When calculating your income, it is up to lenders whether they include your rental income as justifiable income. Some lenders have strict rules regarding this, like Fannie Mae. Fannie Mae requires you to provide tax returns that include your rental income before allowing you to use that income to qualify for a loan.
Your employment history is what determines if your income is sufficient enough to purchase an investment property. Hang on to all your pay stubs and tax returns to prove your source of income. Most lenders will want to see you to have at least two years in experience at your current, paid position. If you work part-time, on tips, or commission, then you may not be seen as financially secure to lenders. Lenders want to see secure employment so they know how you plan to pay back the loan.
Credit Score & Credit History
When applying for any loan, you will need to have good credit score and good credit history. Most lenders will expect at least a credit score of 700 or higher from applicants. If you own several properties, then lenders will want to see a credit score of at least 720 or higher. Having bad credit will ruin your chances of receiving a loan for your investment property. Bad credit is defined as a credit score that is 620 or lower. You can boost your credit score by having low credit card utilization, aim for 30% or less of your available credit and by making payments on time. Additionally, having a long credit history can improve your chances to qualify for a loan on an investment property. A long period of good credit can help to vouch for your financial security.
Sufficient Down Payment
Unlike an owner-occupied home, investment homes require a larger down payment than you might expect. It is suggested to put down at least 20-25% on your investment property to have higher chances of receiving a loan. Owner-occupant housing allows home owners to put down as little as 3% on their homes to receive a loan. Investment properties are different because they require more capital and various different fees along the way. Be prepared to pay for an appraisal fee, origination fee, and other costs that will arise. Lenders want to see large savings when applying for an investment property, and may ask for bank statements to prove it. The longer the history of your savings the better. This proves you are financially secure and are able to responsibly manage money.
Is it hard to get a loan for a home that needs extensive repairs?
Most lenders will use FHA guidelines when offering you a loan. These guidelines define what condition the house needs to be in for purchase. Some areas the guideline requires to be in working condition include plumbing, electrical, and heating systems. Although most lenders use these guidelines to provide some sort of structure when deciding if the house is replenishable, not all lenders go by the FHA guidelines. If you and your lender have a good, trusted relationship, then they may not care about the fixes a property needs.
RCN Capital | Connecticut Hard Money Lender
RCN Capital offers short-term and long-term financing options for real estate investors. Whether you are looking to fix & flip properties or hold properties for rental income, RCN has flexible options that are suited to your needs. Connect with us today to discuss your next real estate investment.