Are you a real estate investor or an upcoming real estate investor interested in a loan for residential rental property? Are you unsure which type of rental loan best suits your needs?
There are several different ways that you can get the rental property of your dreams; you just have first to find out which loan option works best for you and your current situation.
There are also a few other requirements that you should meet before starting the application process. Continue reading below to learn more about loans for residential rental properties and who you can contact for more information.
What Is a Loan for Residential Rental Property?
A loan for residential rental property is a loan that you can use to purchase an investment property or use to invest in a rental property. If you plan on investing in real estate, you will want to get a rental loan that best suits you and your needs.
Conventional loans are the most common type of mortgage loan that most people are familiar with. To get a conventional loan, you have to reach out to a credit union or another traditional lender such as a bank.
To qualify for a conventional loan, you will need a good credit score and a down payment of between 3% to 20% of the home’s final purchase price. The properties your purchase as real estate investments must meet the guidelines set out by Freddie Mac or Fannie Mae.
VA (Veterans Affairs) loans are another option provided by credit unions, banks, and mortgage brokers. These loans are backed by the United States Department of Veterans Affairs and are only available to veterans, active duty service members, and eligible spouses.
A benefit of using a VA loan to purchase investment properties is there is no minimum credit score or down payment if you qualify. You can even use this loan to purchase up to seven units. The only catch to that rule is that you have to use one of the seven units as your primary residence.
FHA Loans (Multi-Unit Financing Option)
FHA, or Federal Housing Administration loans for long, are mortgage loans offered by traditional lenders. Although you get this loan from a conventional lender, the loan itself is backed by the government.
The qualifying down payment and credit score needed to secure this loan is often less than a traditional loan. On average, you only need to put down 3.5% of the final house purchase price.
FHA loans are excellent if you want a loan to construct a new property, purchase a new property, or renovate an existing property. Like the VA loan, you must use one of the units as a primary residence for at least one year.
If you are a real estate investor looking to purchase several rental properties and finance them under one loan, you may want to look into a blanket loan. Blanket loans are also excellent if you wish to refinance a portfolio of existing rental properties.
Traditional lenders such as credit unions or banks don’t authorize blanket loans. If you have interest in blanket property loans, you will need to reach out to a mortgage broker or a private lender.
The required down payment, length of the loan, credit score, and interest rate will vary from lender to lender. If needed, the lender has the ability to customize the loan terms to meet both parties’ needs.
Private Rental Loans
Private rental loans are offered to you by private real estate investment companies. These loans are relatively flexible in terms of their requirements, and they typically provide thirty-year loan terms. You can use this loan to refinance an owned property, or you can use it to purchase a new investment property.
It is important to note that you cannot use this loan to purchase commercial properties. You can only use it to buy residential properties.
Conventional Loans vs. Private Investor Rental Loans
The main difference between these two loans is how you obtain them. You can get a conventional loan from a traditional lender such as a bank or a credit union.
Private investor rental loans come from private lending companies. They also come with less stringent qualification requirements.
Conventional Loan Requirements
As mentioned earlier, conventional lenders require you to have good credit to qualify. For example, most lenders want their borrowers to have a credit score of at least 620: the higher your score, the lower your interest rate.
Additional conventional loan requirements:
- Debt to income ratio less than 45%
- Down payment between 3% to 20%
- Property appraisal
- Proof of income
- Personal tax information
If you put down 20% or more, you won’t have to pay for PMI. Anything less than 20% you will. PMI, also known as private mortgage insurance, protects the lender in the event that you default on the loan.
Rental Loan Requirements
Depending on the lender you partner with, you won’t have such stringent requirements. For example, when you work with a company like LendSimpli, you won’t have to show your personal income information or tax information.
This is because they mainly focus on the value of the property. The minimum credit score requirement for this loan is a 660.
Preparing for a Rental Property Loan
Before you even consider applying for a rental loan, you can do a few things to prepare. For example, make sure that you have the right down payment size. As a general rule of thumb, you should at least have 20% ready to put down.
Adjust Your Budget
If you don’t properly prepare and save up, investing in real estate can put quite a dent in your finances. In addition to your down payment, you should also plan at least six to twelve months of liquid cash reserves.
Having this much money on hand can help you in the event of an unexpected expense. It also enables you to pay for the property’s mortgage while waiting to fill it with a tenant.
Improve Your Credit Score
Although most lenders will take you on with a credit score of around 660, it doesn’t hurt to work on your credit. Higher credit scores typically yield better approvals and lower APRs. Even after you apply for the loan, do your best to maintain your credit so that the closing process goes smoothly as well.
How to Apply for a Rental Loan
Once you find a private lending company you wish to work with, you can take a few steps to apply for the loan. Before you apply, you will want to make sure that you understand what you need.
Understand What’s Needed to Apply
In general, private lenders typically require less information than a conventional lenders. For example, as we stated earlier, most conventional lenders want to see steady income, a high credit score, and a low debt to income ratio. With a private lender, they don’t require as much information.
Brokerage Account Statement
There are several lenders whose requirements revolve around your liquidity. This means they want to see how much cash you have on hand to use towards the deal and if you have enough to handle the mortgage payment. As mentioned earlier, you should at least have six months to one year worth of liquid cash reserves on hand.
Your Business Documentation
Because rental loans are used mainly for business purposes and not personal residential purposes, most lenders require the property to be owned by a business entity. To prove that you’re using your business to purchase the property, you can provide the lender with your articles of incorporation and a certificate of good standing. You can also provide them with an operating agreement.
In most real estate transactions or any significant transaction, you have to provide proof of your identity. This ensures that they are not providing a loan to someone using another person’s identity. In general, a driver’s license, passport, or state-issued ID suffices.
Most lenders require their borrowers to have insurance over the property to cover the property in the event of an emergency. You usually have to carry some form of homeowners insurance to protect the lender’s interest. The lender may require you to add them on as an “additional insured.”
Apply for Your Rental Loan
Once you have all the necessary documents ready to apply for the rental loan, you can get started on the application. Most reputable lenders have an online application process, so you won’t have to worry about filling out paperwork and mailing it in.
The lender will need to know more information about you, the applicant. In this section of the application, you will need to put information about yourself, including your name and personal contact information.
Additional borrower information needed for the application:
- Current place of residency
- Experience as a real estate investor
- Estimated credit score
- Social security number
Most lenders will run a background check on you to see if you have any criminal history. If you do, it is best to be upfront about it because if you don’t, they will find out about it through the underwriting process.
Information about the Property
Before you apply for a rental loan, you should at least have a property in mind. The lender will ask you for an estimate of the “as-is” value unless you have a recent appraisal.
Acknowledgments and Declarations
Even though you may be highly inclined to rush through the application and not read the fine print so you can get through the application process, don’t. Most experienced real estate investors know the importance of thoroughly reading through the fine print so they absolutely understand what they are getting themselves into.
Information you must declare:
- Resident status
- Any outstanding judgments
- Other debts in default
All rental loan applications ask you to declare if you have any personal or financial situations that pertain to you. If you have any recent foreclosures or bankruptcies, be sure to let the lender know.
Are Rental Loans Similar to Hard Money Loans?
Hard money loans are short-term loans that many real estate investors use to get property. The most common use for these loans is for fix and flip loans, not rental properties.
Some real estate investors use them for rental properties, but not all the time due to the high-interest rates and expensive monthly payments. They are similar in the aspect that you have to reach out to a private lender to get either one of the two loans.
The most significant difference between the two is the loan term length. Hard money loans are shorter and usually only last for a few months to two years, whereas rental loans can span over thirty years. Hard money loans also tend to have higher down payment requirements than rental loans.
Secure Your Next Rental Investment
The real estate investor journey comes with high risks and high rewards. Some investors prefer to purchase properties with hard money loans, whereas others are more interested in owning rental properties.
When looking for the right company to get your loan for residential rental property through, you will want to be sure that you partner with a company that can walk you through the entire process.
The rental market is a promising investment opportunity, so make sure you work with a company that can bring your real estate investment dreams to life. Contact us for more information about your rate and see what you qualify for today!