Are you interested in purchasing a property for a rental investment? With the rise in the rental market, many homeowners are looking for long-term investment, and rental properties are a great option. Financing a second property is different from obtaining a loan for your primary residence. Today, we will outline the challenges borrowers might face and the different financing options available for rental property investments.
Challenges To Financing Rental Properties
Before we outline some of the most common financing properties for a rental investment, let’s address some challenges. Financing additional properties can come with certain obstacles that a borrower did not face with primary residence financing.
Lenders are more cautious about additional mortgages as they see it as a more considerable risk. This means that often there are more requirements for obtaining rental property financing. Some of the things that borrowers may run into:
- Banks that are not willing to offer more than one mortgage at a time
- Higher down payment requirements
- Higher cash reserve requirements
- A credit score of at least 720
- Higher interest rates
- A limit on the number of properties you can finance
A borrower can expect that financing a rental property will be more challenging, but it is not impossible! With the right loan and mortgage broker, you can find something that works for your investment goals.
Conventional
A conventional mortgage is what most buyers are familiar with and what most buyers use to
purchase their primary residence. When we obtain a conventional mortgage, we work with various lenders to find the best rate.
A conventional mortgage might have the lowest interest rate if you have good credit, and your down payment may be less than 25%. Conventional loans must meet Fannie Mae or Freddie Mac guidelines. These programs allow up to 10 mortgages by the same borrower, but banks often set a lower limit of around four loans total.
FHA
An FHA loan is insured by the Federal Housing Administration (FHA). This type of loan makes it easier for lenders to offer the homebuyer a better deal, including a lower down payment, low closing costs, and easier credit qualifying. The borrower can also use income from an existing rental property to qualify.
FHA loans are an excellent option for borrowers looking to purchase a multi-family property. Funds can be used for a new purchase or a new construction purchase.. If a borrower uses this type of loan to purchase a multi-family structure, they will be required to use one unit as a primary residence for at least one year.
VA
A Veterans Affairs (VA) mortgage is available to service members, veterans, and eligible
surviving spouses who can receive a loan guaranteed by the Department of Veteran Affairs, which leads to more favorable terms for the borrower. VA multi-family loans are another option for rental properties.
There are many benefits to using a VA loan for a rental property. There is no minimum down payment or minimum credit score, and you may be able to purchase up to seven units with one of the units as your primary residence.
Seller Financing
If the seller owns the property with very little mortgage debt or owns with no mortgage, they may be willing to do a seller finance agreement. Owner financing or a seller carryback is when the property owner finances a sale to the buyer. This process allows the seller to generate interest income and earn a regular monthly mortgage payment instead of receiving the sales proceeds in one lump sum.
HELOC
A home equity line of credit (HELOC) and a home equity loan are options for pulling money out of an existing property to use as a down payment for another rental property loan.
A HELOC is essentially a line of credit secured by the equity in an existing property that a homeowner can access at any time and repay the loan with monthly payments similar to a credit card. A home equity loan is a second mortgage that provides funds to the borrower in one lump sum.
Both a HELOC and a home equity loan usually set the borrowing limit between 75-80% of the home equity.
Financing rental properties may seem daunting, but we can help you make it happen! We can help you jump through all the hoops and find the right mortgage for your investment. Give us a call today, and let’s get you started on your investment journey.
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