Financing Options for Rental Properties

Exploring Financing Options for Buying a Rental Property

Mortgages for investment properties have different guidelines to follow. Essentially, it comes down to the difference between an owner-occupied and non-owner-occupied property. Non-owner-occupied properties are viewed as being higher risk in the mortgage industry and therefore have stricter requirements than a mortgage for a primary residence, but there are still plenty of options.

Conventional Loan For Investors

1. 620 Minimum Credit Score
2. Minimum Down:
   • Single Family (1 Unit) 15% down
   • 2-4 Units  25% down
   • Renovation loan 20% down single family only
3. Renovation Option – This allows an investor to purchase a home, get a bid from a contractor to rehab the property, and finance the cost of that rehab project into the loan.
4. Use up to 75% of the gross rental income to qualify
5. Reserve requirements – Generally speaking, 6 months of reserves are required, however, that amount can increase if the investor owns multiple properties. As an example, if we need 6 months reserves and the house payment is $1,000 per month, then 1000 x 6 = $6,000. Meaning we need $6,000 left over in the borrower’s bank account when we close. Retirement accounts can typically be used to meet this requirement.
6. 2% max seller paid closing costs

DSCR Mortgage – Debt Service Coverage Ratio

This program allows an investor to purchase a property and income qualify based solely on the rent generated on the property. Basically, the program was designed for investors whose debt to income ratios don’t line up based on the traditional calculations of looking at tax returns and paystubs. We simply look to see if the property is generating enough income from the rents received to cover the mortgage payment.

1. 680 Minimum credit score
2. 20% Minimum down
3. No first time buyers allowed (must own a primary residence or another investment property)
4. 2% Max seller paid closing costs
5. 3 Months Reserves

Owner-Occupied Multiunit Property

Although not your traditional investment property, this can be a great way for someone to get started in the world of rental properties. The concept here is that someone would purchase a 2-4 unit property, live in one unit, and rent out the others. The cool thing about buying an investment property and living in one of the units is that the guidelines are much more forgiving.

1.  FHA options available
2. VA options available (zero down)
3. 3.5% and 5% down options
4. 580 Minimum credit score
5. Renovation Options for 1 – 4 units
6. Minimal reserve requirements
7. Gifts allowed
8. 6% Max seller paid closing costs
9. Completely Legal House Hack 

Each of these different options has its advantages and disadvantages. It’s important to understand all of the options available not only for the next purchase but also for future properties. When we consult with investors on the different options, we talk about not only options for the upcoming property but we discuss what the future goals are and how to acquire multiple properties. Call us today to get started or jump online and start the application.