How To Get A Mortgage For A Rental Property
Getting a mortgage for a big investment can be a real pain. There is a need to be enough cash reserves to make your lender happy along with an impressive credit score.
Know your lending limits:
Fannie Mae allows each investor to carry at a maximum of 10 loans at once. If you work with Pioneer Home Loans, they can help you strategize both a long-term and short-term plan to ensure that you are fully taking advantage of your 10 loan limit. Sadly, many lending institutions will only lend up to four loans, usually the bigger banks.
Look For Investor-Friendly Lenders
When you begin purchasing your rental property, an important aspect to your long-term success is choosing a strong and reliable loan service team, and of course, your lender is a HUGE part of that equation.
There is nothing wrong when working with a broker and lender that shops around your financial profile to their selected list of lenders, whereas a direct lender is an institution actually lending you the loan.
When you work straight with a broker, you completely give up control. There can be a chance that there is going to be a change in lending standards (often during escrow) or choose what they want to pull out of the deal at the last minute. When you work directly with the lender, you are going to have more control over the decision making.
Before choosing the lender, here are great questions you need to ask:
- Do you currently work with any active investors?
- How many loans can you offer to any one investor?
- Do you personally own any rental property?
The more loans you obtain the stricter the credit requirements.
As mentioned earlier the loan max that Fannie Mae currently allows is 10 per investor.
Fact: There are two credit-qualification guidelines to obtain these loans. The first 4 loans require a credit score at least 630. Loans 5-10 require a credit score of at least 720.
Make Sure To Obtain Plenty Of Cash
After down payment, lenders are required to have six months of chase reserves available for each property. This means that if you own a residence and you’re going to acquire a rental, the lender will require you to have 6 months of mortgage payments for both your current residence and your future rental.
Once you know the price point of the future rental you are considering, it is a great idea to get an estimated monthly payment so that you can save accordingly.
The More Loans You Obtain the More You Will Need to Pay Upfront
Like I mentioned earlier, there are two sets of guidelines for your credit, there are also multiple sets of guidelines in regards to the down payments that are listed below:
Loans 1-4 (Single-family): 20 percent down
5-10 (single family): 25 percent down
Loans 1-10 (multi-family): 25 percent down (Side note: many lenders will require you to pay 30 percent after loan four)
Use our Loan calculator to see how different interest rates and payments affect your loan.
What will we ask of you? The lender will need to see the receipts (i.e. your W-2)
Lenders will require a minimum of two solid years of W-2 income. They want to see that you’ve been at your job or working in the same industry for at least two years. The underwriter will calculate your annual income by averaging your past two years of gross income. For example, if this year you earned $100,000 and last year you earned $50,000, your average annual income would be $75,000.
If you’re self-employed, you’ll need to provide two years of tax returns, a year-to-date profit, and loss statement, and most likely a letter from your CPA confirming the validity of your previous tax returns. The calculation of your annual income is the same as the W-2 employee. I’m not saying that this is a strategy everyone should employ, but I will say that anyone looking to build wealth should at least review the real estate investment vehicle.