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Rental Property Financing: Not Your Usual Home Loan

heroic investing graphicEven as the country continues to teeter on the fiscal cliff and the housing recovery maintains a slow rebound, mortgage interest rates generally remain astonishingly low. Those low rates make currant conditions ideal for first responders getting started in rental property investing – or for refinancing existing investment properties for money saving better rates. The financing process is similar for loans on both residential and income properties, but some key differences favor the investor.

Some aspects of applying for a mortgage hold true whether a buyer is seeking a residential home loan or financing income properties, such as income and credit information. But lenders also consider other factors related to how the property will be used and existing conditions there in deciding whether to approve an investment mortgage.

Applicants for residential mortgages typically have to provide proof of income, with the debt to income ratio a major factor in getting approval. But for investors, income verification means not just a buyer’s own income, but the income-generating potential of the property itself – and some lenders may not ask to see a potential buyer’s personal income documentation at all. If the property is occupied, a potential buyer may be asked to show rental receipts, net income statements and any income tax documents that reflect the property’s use as an investment.

As everyone knows, residential home loans require a down payment that depends on factors such as the overall cost of the property and requirements specified by the loan originator or servicers. But investors may not be required to put a down payment on property intended for investment, because the property itself secures the loan. What’s more, properties with tenants in place present a better credit risk than a vacant property that needs work to realize its potential. With tenants already in residence on the property, lenders have reasonable assurances that the buyer can meet the payments on the loan.

Depending on the lender and the type of loan, investors also have the advantage in bargaining for terms and rates. Since an income property represents the potential of a consistent cash flow capable of covering loan payments, lenders may be more flexible in creating loan terms for an investment buyer, especially if that buyer has plans to add more properties to their portfolio.

Unlike buyers interested in purchasing a home for residential purposes, investors also have the option of purchasing multiplexes of up to four units under the same terms as single-family homes. With more possibilities for rental income, these properties may offer better options for financing than a single family home.

There are some areas, though, where investors get short shrift. Certain lenders are more willing to handle investment mortgages than others. FHA loans, with their more lenient lending criteria, are available only for residential mortgages, as are some loans offered by other government entities such as Fannie Mae. Refinancing, too, may not available to investors from all lenders; for refinancing options the income property investor may need to shop around for rates and terms.

In some ways, the current lending landscape may be friendlier to investors than homeowners. For heroic investors who are following Jason Hartman’s recommendations for taking advantage of current low interest rates to invest in income property, an investment property loan may be easier to get than a typical home mortgage for a primary home.  (Top image: Flickr/JPhoto)


The Heroic Investing Team

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