Buying rental properties is a great way to invest your money, but qualifying for a loan on an investment property is not always easy. Qualifying for a loan on an investment property is much more difficult than qualifying for a loan on an owner occupied home and will cost you more money. Many banks consider investor loans riskier than owner occupied loans and make it more difficult for investors to qualify. There are many things an investor can do to give them a better chance at being able to qualify for an investor loan.
To learn more about my investing strategy including information on my rental properties check out my complete guide to investing in long-term rental properties.
Is it harder for investors to qualify for a loan than owner occupants?
With new lending regulations it is harder for investors to get a loan on rental properties. If you are an investor and want to get a loan on more than four or more than ten properties it really gets difficult. I have a great article on how to get a loan on more than four properties here.
One of the biggest issues investors run into is they have to qualify for two houses if they have a loan on their personal residence. I think it is very important that people do not buy the most expensive house they can qualify for because of this. You must have a low debt to income ratio to qualify for a new loan whether it is as an owner occupant or investor. If you max out your qualification on your personal home, then it will be very difficult to qualify for a loan on an investment property, because it raises your debt to income ratio.
Do banks require more money down for an investment loan?
Almost every bank will require at least 20% down on an investment property loan. Owner occupants can put no money down on a loan in some cases, but banks want investors to put more skin in the game. The origination fees, appraisal and other loan costs may be more expensive as well depending on what type of investment property you are buying.
Investors must also have more money in the bank than an owner occupant. Most banks will require at least 6 months in reserves for mortgage payments on all houses an investor owns or will own after the loan is complete. If you have a $1,000 mortgage payment on your personal residence and want to get a loan on an investment property that will have a $500 a month mortgage payment. You will need $9,000 in the bank on top of the money you need for the down payment and closing costs. I talk more about what costs are involved to buy a rental property here.
Do banks require a higher credit score on investment properties?
Most banks require a higher credit score for investors looking to buy rental properties. After you have four mortgages conventional lenders will require at least a 720 credit score from investors. While some owner occupied loans may allow a credit score under 600, do not expect to get a loan on an investment property with a credit score under 620. Here is a great tool to help you figure out what you can qualify for from Bank Rate.
Does rental income count when qualifying for a loan?
The rules regarding rental income vary by the bank and type of loan. My portfolio lender has less strict guidelines than a bank that is going by Fannie Mae guidelines. Here are the Fannie Mae guidelines that most banks will abide by regarding rental property income and qualifying for a loan. Fannie Mae will require rental income to show up on your tax return before they allow you to use it to qualify for a loan.
My portfolio lender actually counts much more than the Fannie guidelines allow for as far a rental income. I have to provide leases to show the rental income or my tax returns to show the income coming in. If I don’t provide tax returns, then they do not count the full amount of the rental income.
Qualifying for more than four loans on a property
When you have four mortgages in your name, it gets much more difficult to get loans. Fannie guidelines are listed here, which include 25% down payments, 720 credit score and do not allow a cash out refinance. This is why it is so important to find a portfolio lender who does not follow Fannie guidelines! My lender will still do 80% loan to value loans on more than ten mortgages and allow a cash out refinance on more than ten mortgages as well!
Remember if you already have investor loans in place and you are trying to buy more investment properties, the bank will consider your debt to income ratio. If you have not had your investment properties rented for at least a year it may be very difficult to qualify for more rental properties. This is why I think investors should try not to buy the most expensive house they can at any time. This is not always possible, but buying cheaper houses may allow an investor to keep buying rental properties without having to take long breaks until the rental income can help the debt to income ratios.