Buying rental properties is a great way to invest your money but qualifying for a loan on an investment property is not always easy. Getting a loan on an investment property is much more difficult than getting 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. However, an investor can do many things to have a better chance of being able to qualify for an investor loan. There are also many different types of loans and lenders that can help investors secure financing.
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 allow depend on the loan. I prefer 30-year mortgages because it is easier to get more loans on properties due to lower 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.
- Credit score: Some loan programs allow credit scores under 600, but the lower your score the more fees and costs you will pay. Most investors will need a credit score over 700 and the higher the better.
- Tax returns: Banks will verify your income with tax returns. If you claim very little income, it can be hard to get a loan.
- Bankruptcies/foreclosures: If you have had bankruptcy or foreclosure it can make it very tough to get a loan. If enough time has passed it is possible but one of the first qusitons any lender asks is have you had a bankruptcy or foreclosure.
Why is it harder for investors to qualify for a loan?
With changing lending regulations since the housing crash, 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. Many investors were able to buy three or four houses before the housing crash with hardly any qualifications. Many of those investors lost their homes and helped fuel the housing crash when prices began to drop. Lending guidelines became much more strict after the crash, especially for investors.
Most banks will secure a mortgage from owner-occupants or investors and then sell that mortgage to another lender or on Wall Street. In order to sell that mortgage, the buyers want the loans underwritten with very strict guidelines. So the vast majority of lenders make it very tough for investors to get a loan thanks to those strict guidelines.
The government offers many options for owner-occupants like FHA loans, which are insured by the government. It is much easier for banks to sell those loans and there are many more buyers for those loans because there is less risk thanks to the government insuring them. The banks would much rather lend to owner-occupants so they make it easier for them to qualify. There were even new regulations put in place that only allow banks to have a certain percentage of their loans for investors and the rest must be to owner-occupants.
How much money down do investors need?
Most banks require at least 20 percent down on an investment property loan. Owner-occupants can put 3, 3.5, 5 percent down, or even 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. Some investors may be able to get loans with a credit score of around 700 but 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. If you are able to find a local bank or national lender who loans on investment properties you may be able to get away with a lower credit score.
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’s 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. There are some national rental property lenders that will not care about debt to income ratios!
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 include a 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 is 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.
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 investment 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.