Rental Property Loans: What You Need To Know
If you are just getting started in the rental game, you may not have the cash flow to purchase your homes outright. You are going to need to work with a lender that is familiar with rental properties and the loan products available to you as an investor. Here's what you need to know.
What do banks look at when lending on a rental property?
When assessing a loan application for the purchase of a rental property, banks will typically consider many factors. Income and employment history are important factors in determining whether or not an applicant can afford the loan payments.
The value of the property being purchased is also important, as it will determine the amount of equity the applicant has in the property. The applicant's credit history is another important factor, as it will show how responsible the applicant is with debt.
Does a rental property count against your debt-to-income ratio?
Debt-to-income ratio (DTI) is a metric that lenders use to assess an applicant's ability to make loan payments. DTI is calculated by dividing an applicant's monthly debt payments by their monthly income. A high DTI indicates that an applicant may have difficulty making their loan payments, and as such, a rental property may count against an applicant's DTI.
Can you get FHA financing on a rental property?
Yes and no. If you get an FHA loan on a single-family home, it must be owner-occupied. In other words, you must live in the home. If you are seeking a rental property loan for a duplex or multi-family unit, you can get FHA funding. As long as you live in one of the units, you can rent out the others and still qualify for financing.
Is there a max number of units that you can get rental property loans on?
Mortgage loans are divided into two main categories for investors: residential and commercial. Residential lending is considered four units or less while commercial is anything larger. In other words, if you find a small apartment building with five units, you will be forced to look into commercial rental property loans, which are much more complicated. Beginning investors are typically urged to stay with four-plexes or smaller rental units.
Is there a max number of rental property loans you can have at one time?
Typically, banks like to see investors have a max of ten loans. Talk to a financial adviser about your options in terms of incorporating to avoid this restriction.
In conclusion, rental property loans can be a great way to finance the purchase of an investment property. Be sure to work with a lender that is familiar with this type of purchase.