Using Future Rental Income To Qualify For Mortgage
Using future rental income to qualify for mortgage will increase your chances of an approval. Experienced investors go beyond their regular compensation and use supplemental income from a rental property to increase earnings. Why not use a lender to leverage your money to make residual income while your sleeping?
Down Payment Of At Least 20%
A large down payment helps to offset the risk of having to foreclose on the investment property and sell it to make back the balance owed. The sale may not recover the total of the loan, so a large down payment helps mitigate this risk. In comparison, most conventional loans require a down payment of around 5 to 15 percent.
Things To Watch Out For When Financing A Rental Property
People often assume they can rent their second home when theyre not using it. This is false, and can land you in trouble. Its critical to understand why you cant ever rent out a property you financed with a second-home mortgage.
The reason this isnt allowed is because of how the IRS treats taxes for second homes. If you own a second home, the mortgage interest and property taxes on that second home are fully deductible just like mortgage interest and property taxes for a primary residence.
Knowing this, it makes more sense that lenders dont allow you to rent out a property with a second-home mortgage on it, because youd be double dipping by getting rental income and also getting the same tax benefit as you do with a primary residence.
If you want to have a second home that you can also rent out, then you need to finance it with a rental property mortgage to comply with lender and IRS rules. This means youll need a larger down payment, and will pay a slightly higher rate, but you will benefit from the income and you can also use the income to qualify for the loan.
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Opt For A Larger Down Payment Where Possible
Whenever possible, reduce the interest rate in exchange for a larger down payment. In some cases, it might also make sense to pay upfront fees to lower the rate. If you apply for a big loan and plan to hold the property for a long time, paying upfront fees and/or a higher down payment could trim thousands of dollars from your repayment total.
Can I Use The Equity In My Home To Buy An Investment Property
Yes. Provided you qualify, you could tap your equity through a cash-out refinance, home equity loan or home equity line of credit , and use those funds to cover the down payment on an investment property mortgage.
A cash-out refinance allows you to take out a new mortgage for more than your current loan and withdraw the difference in cash. A home equity loan is a lump-sum payment thats repaid in fixed monthly installments similar to a traditional mortgage while a HELOC is a revolving credit line that works much like a credit card. Your main home is used as collateral for all three of these options, and you could lose it to foreclosure if you fail to repay any of these loans.
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Higher Rates Down Payments
Joe Parsons, senior loan officer with PFS Funding in Dublin, California, said that the interest rates charged on second and investment properties can vary widely. He uses the example of a $400,000 property. If lenders consider that property a second home, a borrower who puts down 20 percent could expect an interest rate of 4.125 percent for a 30-year fixed-rate loan.
But if that same borrower were to buy the identical property as an investment home, the borrower would probably be charged an interest rate of 4.875 percent with the same down payment of 20 percent, Parsons said. If the borrower came up with a larger down payment of 25 percent, the interest rate would probably fall to 4.5 percent, Parsons said.
Down payments are another potential challenge for buyers purchasing second homes or investment properties. Mindy Jensen, community manager with real estate investing social network BiggerPockets, says that you might be able to purchase a second home with a down payment of as low as 10 percent of that homes final sales price. But most lenders will require that 25 percent down payment for investment properties, Jensen said.
Qualifying for a loan for a second or investment property can be challenging, too. Thats because you might already have an existing mortgage loan that you are paying down, and those monthly payments are included in your debts.
Turnkey Rentals And Move
There are two terms you may come across as you search for rental homes: turnkey rentals and move-in ready. The idea behind both terms is that the investment property wont require renovation or repairs before its ready for tenants.
Some turnkey providers offer financing for as little as 5% down. But these loans generally feature high interest rates.
Buying a rental property that you may be able to start earning money from immediately can seem appealing. However, seasoned investors warn these types of investments arent always what they seem.
Instead of properties being in good condition for tenants, sellers of move-in ready or turnkey rentals may skip repairs they dont deem essential. The result may be more frequent tenant turnover and a host of other potential problems.
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Figure Out Your Margins
While its safe to say that barring any major mistakes youll make money investing in a hot real estate market like Canadas, its important to calculate your margins carefully to avoid any surprises. By doing this before you purchase a property, youll give yourself enough flexibility to change tactics if needed.
There are three very important metrics that can help you determine your margins:
- cash flow: your monthly rental income, minus expenses
- cap rate: x 100
- cash on cash return: x 100
You should also consider the 1% rule, which involves aiming to charge rent equivalent to no less than 1% of your propertys value. Then, youll need to find a monthly mortgage payment less than that amount. By doing so, youll increase your chances of profitability.
Ask For Owner Financing
In the days when almost anyone could qualify for a bank loan, a request for owner financing used to make sellers suspicious of potential buyers. But now its more acceptable because credit has tightened and standards for borrowers have increased.
However, you should have a game plan if you decide to go this route.
You have to say, I would like to do owner financing with this amount of money and these terms, Huettner says. You have to sell the seller on owner financing, and on you.
This game plan shows the seller that youre serious about the transaction and that youre ready to make a real deal based on the practical assumptions that youve presented.
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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. 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 a loan on an investment property. There are also many different types of loans and lenders that can help investors secure financing.
Apply For An Investment Property Loan With Dash Today
Do you have some burning questions about investment property loans in North Carolina or South Carolina? Reach out today to speak with one of our friendly Mortgage Coaches. Theyll take the time to discuss every step of the lending process.
Ready to get started? Sweet! Click Apply now below to start your application.
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Determine The Property You Can Afford
Dont just assume that you can afford whatever amount you can obtain through a loan. Sit down and carefully go over your personal budget to determine what you can afford. Consider the worst-case scenario when you buy an investment property. For example, if you buy a rental home, dont assume youll rent it out in the first month and that youll be able to use that income to make your monthly payments. Its entirely possible that you may not be able to find a tenant for more than a few months and have to budget for that possibility.
Have A Formalized Investment Strategy
Lenders will feel much more comfortable knowing that you seem to know what youre doing and that you have a plan of action. For example, if youre planning to buy a fixer-upper, you might outline all of the renovations you plan on making and the cost of those renovations along with how much you expect to make once you turn around and sell it. You might even provide examples of similar houses that sold in the same area as a way to justify the selling price.
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Should You Hire A Property Management Company
You need to decide whether you want to handle property repairs, tenant management and maintenance yourself or if youll hire a property management company to manage the daily maintenance on your behalf.
Property management companies take both scheduled and emergency repair calls and check up on your property with both drive-bys and scheduled visits to make sure that tenants respect your space. They can also collect rent on your behalf. Some property management companies also offer tenant placement services and eviction processing for an additional fee. In exchange, the property management company takes a percentage of your monthly rent. If you live far away from your property or you dont have the home repair skills to fix your own property, hiring a property management company may be a great choice.
The Investment Property Loan Process
If you plan to finance your investment property with a mainstream home loan , the process will look very similar to any other home purchase. You will:
As when buying a home for yourself, its a good idea to get preapproved for a mortgage before you begin house hunting. That way, youll know how much home you can afford. And, more importantly, the seller and sellers real estate agent will know youre making a serious offer.
Before you settle on a lender, make sure to comparison shop for the very best mortgage rate you can find. Investment property mortgage rates are often 0.50 to 0.75% higher than those for standard mortgages. And the lower your rate, the higher your profit margin on the property will be.
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Options For A Rental Property Loan
Its much easier and less expensive to find a loan option for a residential rental property like a house or a duplex compared to a large apartment building or commercial property. If youre shopping around for a rental property loan online, you can get a free rate quote from an experienced mortgage professional on Stessa.
Here are some of the options to look at when you need a loan for buying a rental property or refinancing an existing mortgage:
Investment Property Loans And The Difficulty Of Acquiring One
Real estate can provide a great opportunity for investment if you know what youre doing. Even small investors have made a tidy profit off of flipping houses or renting out properties. However, just because you invest money into a property doesnt mean that you will automatically make a profit. In fact, this is exactly why securing an investment property loan can be more challenging than you might think.
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Proactively Improve Your Credit Rating
For the most part, youll need good credit to obtain an investment property loan. Work on improving your credit to make qualifying easier by paying off outstanding debts and by making sure you pay all your bills on time. If you have credit card debt, try to get your debt-to-credit ratio down to 30 percent.
Pros & Cons Of Investment Property Loans For Nc & Sc Homeowners
Lets start with the positives. An investment property loan is a convenient financing tool that allows a savvy borrower to catalyze their net worth. Unlike stocks, which are fairly volatile, a two-bedroom cottage is a tangible investment that appreciates over time. That quaint home can also offer passive rental income or, with some sweat-equity, be flipped to generate a large lump sum.
But investment property loans arent all sunshine and shiplap. These lending instruments are hard to come by. Without a superb credit score, big down payment, and low debt-to-income ratio, a lender may not give you the time of day. If you do get approved, expect your interest rate to be 0.25% to 0.75% higher than that of a primary residence mortgage.
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Can I Take A Home Equity Loan On My Rental Investment Property
Unfortunately for those wondering, home equity loans and home equity lines of credit are specifically available only to owner-occupied properties. On the bright side though, investors can take advantage of low current mortgage rates and high home appraisals to access equity with a cash-out refinance of their rental properties instead. Rocket Mortgage® does not offer home equity loans or HELOCs.
Get approved to refinance.
Get Fast & Dependable Rental Property Loans From Visio Lending
Visio Lending is a leading provider of 30-year financing to investors in single-family residential rental properties, including vacation rentals. Visio underwrites its flagship product, the Rental360, based on property level cash flow and borrower credit, rather than the borrowers personal income. As a result, the Rental360 is an ideal financing product for the self-employed investor or the investor that is building a portfolio of rental properties.
Key advantages of Visios Rental360 program over agency or bank portfolio loans include:
- No personal debt-to-income calculation: Visio uses either in place or market rents when estimating the property level cash flow
- Low documentation requirements: Visio does not require tax returns or employment verification
- Legal protections: Visio allows a customer to finance their rental properties in LLCs and corporations to shield their other personal assets from potential liability
- Scalable: With proven experience and payment performance, there is no hard limit to how many properties an investor can finance with the Rental360 program
Visio provides purchase and refinance financing up to 75% LTV. Commonly a customer obtains a cash-out refinance from Visio to purchase or improve another rental property. Since late 2015, Visio has financed more than $2 billion in Rental360 loans.
Editor’s Note: This post was originally published in April 2021 and has been updated in July 2022 for freshness and accuracy.
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Risks Of Using Home Equity On A Rental Property
As with any financial product, there are some risks to consider when using a home equity loan or HELOC on an investment property.
- Primary residence acts as collateral. If you can no longer make payments on the home equity loan or HELOC, the lender will foreclose on the collateral property in order to fulfill your debt obligation. In this case, that is your primary residence.
- Closing costs & fees. You will have to pay closing costs and fees on your home equity loan or HELOC. While these arent typically as high as closing costs on mortgages, other loan optionssuch as personal loansoften dont have any fees.
After Steep Rise Mortgage Rates Appear To Be Stabilizing
With inflation still running hot and the Federal Reserve responding aggressively, the average rate on 30-year mortgages has climbed significantly.
The bump comes as the Fed has moved to raise rates in 2022. The central bank is ramping up efforts to fight inflation, which has remained high after a bout of pandemic stimulus. In May, annual price increases clocked in at 8.6 percent.
Inflation is out of control and until it peaks, neither will mortgage rates, says Greg McBride, chief financial analyst for Bankrate.
While the central bank directly moves interest rates on some mortgage products, namely adjustable-rate mortgages and home equity loans. Fed policy has fewer ramifications for fixed mortgage rates, which more closely follow the 10-year Treasury yield. The 10-year Treasury does react to inflation, however, and also to investor sentiment, with the benchmark yield recently trending upward.
For borrowers, the spike marks an end to the historically low rates that characterized the period following the global financial crash of 2008 and 2009. Rates were as low as 3 percent in August 2021. In June 2022, they approached 6 percent. However, there are signs that the rate is leveling off and may even fall amid signs inflation is easing a bit.
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Should You Flip Or Rent
Should you flip houses or purchase rental properties?
It all depends on your goals, and to what degree you can leverage your skills, expertise and your current financial situation.
In general, house flipping is usually the bigger gamble because these deals hinge on whether property values will rise in the near future. Although price depreciation is never a good thing for property owners, stable and/or falling prices have less impact on someone whose main source of income comes from rents versus a fast resale of a property.
In mid-2017, the highest flipping returns were in Pittsburgh, at 146.6% Baton Rouge, LA, at 120.3% Philadelphia, at 114% Harrisburg, PA, at 103.3% and Cleveland, at 101.8%, according to ATTOM Data Solutions. These cities topped the list because they had lots of affordable, older homes that could be quickly renovated. At the same time, housing prices there were also rising.
For rental properties, the best markets in early 2017 were Cleveland, with an 11.5% annual return Cincinnati, at 9.8% Columbia, SC, at 8.6% Memphis, TN, at 8.5% and Richmond, VA, at 8.2%. The worst markets were generally located in the biggest cities on either coast, where real estate prices have long been sky high.
But local markets are always changing. Like any other type of investment, real estate carries both risks and rewards. You can reduce the risks by thoroughly researching markets and your financing options, but you can never entirely eliminate them.
