Many Americans may understandably feel a little gun-shy about the real estate market these days, but the truth of the matter is that there has never been a better time to invest in real estate. Mortgage rates are at all time lows, and with a market still only slowly recovering, many homes can be bought for a great deal less than they were worth several years ago. In particular, this is a great time to invest in a rental property.
However, with the tightening of the mortgage industry, and the fact that the requirements for non-owner occupant (NOO) mortgage lending being more stringent than those for owner occupants (OO), you should know that you will face many hurdles to that first purchase of a rental property. If you are considering becoming a landlord, here is what you can expect from mortgage lenders:
1. Down payment and cash reserves. Gone are the days when you could take out a second mortgage on a property to function as your down payment. For an investment or rental property, you can expect to be required to have a 20% down payment — and putting 25% down could potentially qualify you for a better interest rate.
On top of that, mortgage lenders will need to see that you also have enough savings in your bank or savings accounts in order to cover six months worth of expenses — both the expenses for your rental property, as well as your personal expenses. Lenders need to see that you will not go belly up if you have any trouble finding tenants.
2. Great credit-worthiness. Depending on the specific lender, the credit score you need should be anywhere from 720 to 740 or above to qualify for the best rate. While you will likely be able to find lenders for your rental property if your credit score is not quite that high, know that you will pay more in interest or fees. The cost can range from one-quarter of a point to two points to keep the same rate.
In terms of calculating your debt-to-income ratio, however, remember that some banks will include some of your estimated net rental income to help determine your ratio, which will help you in underwriting.
3. Two years of income. Lenders will want to see that you have at least two years of income in the same job or industry, with W2s as proof. While self-employed prospective landlords can also qualify for a mortgage, know that you will have more hoops to jump through in order to show that your income meets the requirements. If you are self-employed, lenders will likely ask you to provide two years of tax returns, a year-to-date profit and loss statement at the very least. Some lenders may also require a letter from your CPA to confirm the validity of the tax returns you submit.
The Bottom Line
Qualifying for a mortgage on a rental property is no easy task. However, now is an great time to invest in rental real estate for those who can find a property where the numbers make sense. Any serious investor who can find the time and resources to meet the stringent mortgage requirements should definitely take a serious look.
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