When it comes to acquiring a rental property loan, there are a lot of similarities to a mortgage on a primary residence, but some big differences as well. The similarities stem from the application process, as you need to provide your creditworthiness, documentation of income, debt, etc. The differences lie in the nature of the loan itself. Rental property loans are viewed by lenders as having a higher level of risk, because it’s not always certain the borrower will have consistent renters to generate positive cash flow.
Rental Property Loans Vs. Primary Home Loans
The following are some of the main differences between a rental property loan versus a primary home loan:
- Larger down payment, typically 20-25% depending on the property and borrower
- Higher interest rates and fees to compensate for risk
- Credit score of roughly 620 or more
- Debt-to-income ratio of less than 36%
- Sufficient cash reserves, typically 6 months’ worth
In this blog, we break down 6 common types of loans so you, the investor, can determine which option is right for your investment.
Conventional Mortgage Loans
Conventional loans are the most common financing option for property investors, and it’s likely you already are aware of conventional mortgage loans if you own your own home. This type of loan is offered by private entities such as banks or mortgage brokers, and it follows the rules and regulations put in place by Fannie Mae or Freddie Mac.
While the process of obtaining conventional mortgage loans for rental properties can vary depending on where you live, the standard requirements investors need to meet in order to qualify are mostly listed above.
Private Money Loans
Private Money loans are offered by experienced real estate investors who know the ins and outs of the industry. Investors will typically seek out private money loans if they’ve been turned down by banks. Private lenders often offer loan terms and fees that are customized to match the deal potential and experience of the borrower. Additionally, private investors can be more flexible when it comes to your creditworthiness. If the rental value of the property is substantial and justifies the loan, private lenders may be more inclined to approve the loan compared to conventional lenders.
Home Equity Loan
For those with substantial equity in their primary home, a home equity line of credit (HELOC) loan is available. Investors can simply borrow against the equity of their home to use towards buying a second home. Home equity loans are essentially a second mortgage, but typically have higher interest rates. This type of loan is a good choice for a responsible investor. If you know exactly how much you need to borrow and have a steady, reliable source of income to repay the loan, this is a sensible financing option.
FHA loans are a good option for multifamily property investors looking for a rental property loan for a new purchase, or renovating an existing property. FHA loans are offered by traditional lenders and mortgage brokers. Credit score requirements and down payments are usually lower than conventional loans, and income from an existing rental property can be helpful to qualify. However, investors are usually required to use one unit of the property as a primary residence for at least one year in order to qualify.
Find Loan Options with RCN Capital
Here at RCN Capital, we lend to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors. Our loan options are flexible and competitive, so connect with us today to discuss your next rental property investment.