Before shopping for rental property financing, you will want to go over your financial metrics to decide about whether this is the right time to invest in a rental property.
Following are some important considerations to review before you apply for a rental property loan. If yous till need some work in some of these areas, it may be well worthwhile to put off applying for a loan until your financial situation is more ideal.
1. You need a solid credit score.
It is harder to qualify for rental property financing than it is to qualify for a loan for a primary residence. Before you apply,check your credit score. Make sure that at a minimum, it is around 640. If it is lower than that, you risk being turned away for a loan.
If time permits,consider trying to boost your credit score even higher before filling out your application. This will give you access to more competitive loan offers. Even though it may require a bit more patience now, in the long run, it may pay off in tremendous ways.
2. You need money for a significant down payment.
Even with a good credit score, rental property financing requires a higher down payment on average than a regular loan. That means that you need to be prepared at a minimum to make a 20% down payment. Down payment requirements can however soar up to 40% of the home’s purchase price.
Also consider that it may be in your best interest to put down a higher down payment if you have that option. This may open the door to lower interest rates, saving you money over the long run.
3. You will need three to six months of cash reserves.
Because a rental property is often seen as a higher risk purchase, lenders are going to want to know that you have the financial means to keep paying on the property even if something in your financial life goes wrong.
You should be able to demonstrate that you have three to six months of cash reserves for situations like these. Some lenders may ask for even more.
This is also important for other reasons. Things can and often do go wrong, and it is vital for you to know you will not immediately fall behind on your payments.
If you still do not have these kinds of cash reserves, you should generally not apply for a rental property loan until you have built them. There may sometimes be an exception in cases where your assets are substantial and reasonably liquid.
4. You will have to have the money for more expensive upfront fees.
With any type of property loan, you can expect to pay some fees upfront. Those fees tend to be higher with rental properties than primary residences, however. Make sure that you get an estimate on this combined cost while you are applying for the loan.
5. Over the long-term, you will need to be able to handle paying a higher interest rate.
Finally, interest rates on rental property loans also often exceed those for primary residences.This is a long-term cost which you will need to calculate and account for in order to be certain you can afford your loan now and over the years to come.
Go Prime Mortgage Is Your Rental Property Financing Company
We have helped customers throughout Florence, AL and the surrounding region to apply successfully for competitive rental property financing. If you are ready to take the next steps toward your real estate investment goals, please give us a call today at (256) 690-5132 to schedule your consultation.