You may be dreaming of getting a rental property soon. Do you know how you will be able to afford it, though?
The answer may be through a rental property loan. This guide will show you the different types of rental property loans that you can access to make your dreams come true.
What is a Rental Property Loan?
First things first — what is a rental property loan? It is the type of loan that you access when you want to purchase an investment property or invest in a rental property.
A rental property loan is a great way to secure an investment property that can result in financial stability in the future. This is especially true if your returns on investment become quite significant.
That being said, there are some important things for you to consider when preparing to finance a rental property with a loan.
You Will Need a Down Payment
In a similar way to mortgages, you will need to have a down payment when you receive a loan. Unlike mortgages, however, your down payment may be quite high. With some lenders, you may even need to put down 20% of the entire cost, all in one go.
This is important to consider because you will have to calculate your finances to ensure that you can afford the loan.
Lenders Will Consider Your Credit Score
Before you can get approved for a rental loan, you will need to have a good credit score. This number reflects your creditworthiness and will show lenders how risky it is to be lending to you.
Based on the FICO credit score scale, a ‘good’ credit score ranges between 670 to 739. Anything lower than this may result in difficulties when you try to apply for loans.
You can improve your credit score by paying back your existing loans or bills on time. Another way is to restrict the amount of spending that is financed by your credit cards. It’s also important to have a borrowing history, as this will show lenders that you can be relied on to pay them back.
You Have to Adjust Your Budget
There’s no sugarcoating it. Investing in a rental property will deal a blow to your current personal finances, even if it may be profitable in the long run.
This is something you have to be prepared for. You may have to restrict your spending or change up your spending habits. If this temporary discomfort works for you, though, then you can be cut out to be a rental property investor.
Different Lenders Look for Different Things
There are no two lenders who will have the same priorities or the same assessment standard. It’s important to know what your potential lenders are looking for and to find ways to satisfy their requirements.
For instance, some of them may want to see that your debt-to-income ratio is low. This is the amount of debt you have compared to the income you make.
Some lenders may also require that you have a certain amount of cash in the bank to alleviate risk.
Types of Rental Property Loans
When financing a rental property, know that not all rental loans are made equal. These are some common types of loans that you can consider.
Conventional Loans
A conventional loan is a loan that is not insured by the government but is instead supported by private lenders and traditional lenders such as banks or credit unions. They tend to have lower interest rates but will also require a good credit score.
On average, they may look for down payments that are between 10% to 15% of the total cost.
FHA Multi-Unit Financing
This loan is supported by the Federal Housing Administration and will be provided for whole families. The positive side is that the down payment and credit score requirements tend to be lower than traditional loans.
If you apply for this loan, however, you will need to live in one of the units you purchased for at least a year.
Blanket Mortgage Loans
Are you looking to purchase multiple rental properties? This loan provides coverage for more than one property and is offered by private lenders or mortgage brokers.
When it comes to down payments, credit score requirements, or interest rates, it will depend on individual lenders. Make sure you pay attention to the release cause, in case you want to sell one or more of your rental properties under the loan.
Private Money Loans
Private investors can also offer private money loans. This type of loan is generally more flexible in terms of the requirements. Some private investors may even accept a cut of the property’s future profits in exchange for lower interest rates or a lower down payment.
Seller Financing
The seller financing option involves the property seller being the one providing you with the finances to manage your purchased property. This is a suitable option when the rental market is experiencing a downturn, or when demand seems to be low.
It is also a relatively flexible option, and allows you to negotiate with the seller for the right terms and conditions of the loan.
The Importance of a Rental Property Loan
If you are looking for an investment opportunity, the rental market is often a promising one. Before you can make the profits, however, you have to buy an actual rental property by using a rental property loan.
There are different types of loans out there that can suit your greatest needs.
Contact us today for rental property loan options.
