How to Qualify for a Loan on an Investment Property

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 it will cost you more. Many banks consider investor loans riskier than owner-occupied loans so they make it more difficult for investors to qualify. An investor can do many things to have a better chance of 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.

The basics of qualifying for a mortgage on an investment property

When qualifying for a home mortgage, most banks look at multiple factors.

  • Debt-to-income ratios: How much money you make each month, compared to how much your debt payments are each month. The percentages a bank will be okay with depend on the loan. I prefer 30-year mortgages because it is easier to get more loans on properties due to debt-to-income ratios.
  • Time at the job: Most banks want to see a borrower at the same job for two years before they will give them a loan. If a borrower switches jobs but stays in the same field, banks will usually be okay. The bank will want to verify income, which makes it very hard for retirees to get a loan.
  • Credit score: Some loan programs allow credit scores under 600, but the lower your score the more fees and costs you will pay.
  • Tax returns: Banks will verify your income with tax returns. If you claim very little income, it can be hard to get a loan.

Check your credit score here to see if you can qualify for a loan.

Is it harder for investors than for owner-occupants to qualify for a loan?

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 that they have to qualify for two houses if they have a loan on their personal residence. It is very important for people not to 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 as an investor. If you max out your qualification on your personal home, it will be very difficult to qualify for a loan on an investment property because it raises your debt-to-income ratio.

What makes a good rental.

Do banks require more money down for an investment property loan?

Most banks require at least 20 percent 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 fee, and other loan costs may be more expensive as well, depending on the type of investment property you are buying.

Investors must also have more money in the bank than an owner-occupant. Most banks require at least six months in reserves for mortgage payments on all houses an investor owns, including the new loan. 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 monthly 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 for investment property loans?

Most banks require a higher credit score for investors looking to buy rental properties. After you have four mortgages, conventional lenders 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 follows 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 requires 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 do not provide tax returns, 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 percent down payment, 720 credit score, and they do not allow a cash-out refinance. It is so important to find a portfolio lender who does not follow Fannie guidelines! My lender will still do 80 percent 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. Investors should not buy the most expensive house they can. This is not always possible, but buying less expensive houses may allow an investor to keep buying rental properties without having to take long breaks waiting for the rental income to help the debt-to-income ratio.

Is it hard for an investor to get a loan on a home that needs repairs?

My portfolio lender does not care about the repairs a home will need when I buy the home. They want to make sure it appraised for the price I am buying it for, but my lender is very flexible on any repairs needed. Conventional lenders are much stricter with owner-occupied and investor loans. Most conventional banks want a home to be in livable condition even if an investor is buying it. Here is an article with much more information on what condition a home needs to be in to get a conventional loan.

Conclusion

It is definitely more difficult to get a loan as an investor than it is as an owner-occupant. Planning is extremely important for an investor, especially when they have a large personal mortgage. If you max out your personal qualification, it will be very hard to qualify for an investor property. I would talk to a lender right away if you are interested in buying an investment property to see whether you qualify or what you need to do if you do not qualify. Here is a great article on how to lower your debt-to-income ratio.

For more information on how to buy the best rentals which will make the most money, check out my book: Build a Rental Property Empire: The no-nonsense book on finding deals, financing the right way, and managing wisely. The book is 374 pages long, comes in paperback or as an eBook and is an Amazon bestseller.

11 thoughts on “How to Qualify for a Loan on an Investment Property”

  1. Skips the banks. Their outdated underwriting models/practices best suit the age of W-2 wage earners, not the real estate entrepreneurs of the new millenium, where speed counts and the Gig-Economy disrupts! Whether large commercial banks or community portfolio lenders, their market dominance in the sphere of lending is rapidly eroding. Income stability is shifting from W-2 to 1099, Schedule C and other forms of revenue reported to the IRS. The age of non-bank fintech lenders (be they institutional/insurance companies, private equity, et al) often require far fewer docs, since they’re not hindered by banking regulations, and actually lend on the asset’s performance, rather than the borrower who may not conform (eg self-employed, etc). There are many new mortgage products now tailored for investors, including those that factor STR Airbnb income. Mortage brokers can also supply investors with many more sources of mortgage financing than banks.

    https://www.inman.com/2016/11/01/big-banks-cede-market-share-to-nonbanks/
    https://thefinancialbrand.com/70240/business-banking-strategy/
    http://www.bain.com/publications/articles/retail-banks-wake-up-to-digital-lending.aspx
    https://gomedici.com/are-traditional-players-losing-out-on-retail-and-commercial-banking/
    https://www.nytimes.com/2017/01/21/business/dealbook/quicken-loans-dan-gilbert-mortgage-lender.html

  2. The brand new home finance loan guidelines ended up drawn up through the Client Monetary Protection Agency, created following enactment with the Dodd-Frank Act this year. Some fresh rules are created to shield home owners coming from lender along with mortgage-service abuses.

  3. I cannot show my tips in my tax due my restaurant policy(they want to hide their “real” income), and I don’t want to pay more tax on earned income. However, last year I bought 3 rental properties; two of them are rented, but the 3rd is on rehab and ready to be rented next month. My situation is kinda strange because my this year income in w2 will be almost 100% higher compared to last year. Do you think I need to wait one more year to qualify for the mortgage? because my income inw2 suddenly go up from rent and also I heard that bank want borrower to have steadily income for year or more. Be honest I want to be qualified for mortgage now because I don’t want all of my money tied down in my properties. I rather use leverage to increase my passive income. (I strongly agree with your article about leveraging to increase ROI)

  4. Does portfolio lenders offer 30 years fixed rate?do you think it is better to buy cash, rehab, then refinance than morgagte, rehab, then refinance? As a server, my w2 is horrible because mostly my income is from tip which does not show in w2. So I don’t have much choice, but to buy rental property by cash and wait for my w2 to get better and cash out refinance and hopefully qualify for the mortgage in next year or couple years.
    James

    • Hi James, my portfolio lender does not. They only offer 5, 7 year ARMs or 15 year fixed. The ARMs have a 30 year amortization though. I don’t think many portfolio lenders offer 30 year fixed. If you have the extra cash it probably saves you money to buy with cash and then refinance, but most lenders are going to want to see you hold the home for at least a year before they will refinance for more than the purchase price. You could always show your tips on taxes, but then you’d have to pay more in taxes. A tricky situation for those in the field.

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