How to Get the Best Mortgage Loans for Your Rental Property

Buying a rental property can be a great way to generate passive income. However, financing a rental property is different than getting a mortgage for your primary residence. You’ll need a larger down payment, and lenders view rental properties as riskier investments. This guide will walk you through everything you need to know to get the best mortgage loan for your rental property investment.

Overview of Mortgage Loans for Rental Properties

When you’re buying a home to live in, you can often qualify for a conventional mortgage with just 3% or 5% down But when buying an investment property, you’ll typically need at least 15% to 20% for the down payment Lenders view rental properties as riskier, so they want you to have more skin in the game upfront.

You’ll also have higher interest rates on rental property mortgages, Expect to pay 025% to 05% higher than you would on a primary residence, Lenders need to be compensated for the extra risk,

Finally, you’ll have stricter requirements for debt-to-income ratio and credit scores Lenders want to see you can comfortably afford the mortgage payment on top of your existing debts Excellent credit also demonstrates you can responsibly manage this type of investment.

Should You Buy in Cash or Finance?

When buying a rental property, you have two options:

• All-cash purchase – No mortgage, so you avoid interest but tie up your capital.

• Financed purchase – You put down 15-25% and finance the rest. This preserves more cash, but you pay interest.

An all-cash purchase avoids monthly mortgage payments, but it ties up your money indefinitely in the property. You also miss out on the tax advantages of mortgage interest deductions.

That’s why financing a portion of the purchase price is usually the better option. Aim for at least 20% down to get the best rates and avoid private mortgage insurance (PMI).

Mortgage Options for Rental Properties

You have several options when it comes to rental property mortgage loans:

• Conventional loans – Offered by private lenders and federally backed. Require at least 15% down.

• FHA loans – Insured by the Federal Housing Administration. Only require 3.5% down.

• VA loans – Offered by the Department of Veterans Affairs for eligible borrowers. Require no down payment.

• USDA loans – For properties in rural areas, offered by the USDA. No down payment required.

• Portfolio loans – Offered by community banks and credit unions. More flexible criteria.

Conventional loans are the most common for rental properties. FHA loans offer lower down payments but have stricter criteria and higher mortgage insurance premiums. VA and USDA loans are great options if you qualify. And portfolio loans from local lenders provide individualized options.

How to Get Preapproved for a Rental Property Mortgage

Getting preapproved for a rental property mortgage involves many of the same steps as getting a primary mortgage:

• Review your credit reports and scores from all three bureaus. Aim for at least a 680 FICO score.

• Calculate your total monthly debts and income to determine your debt-to-income ratio. Should be below 45%.

• Gather pay stubs, tax returns, bank statements, and other financial docs.

• Shop and compare rates from multiple lenders. Apply with the lender that offers the best deal.

• Be prepared to make a larger down payment, usually 20% or more of the purchase price.

The preapproval letter indicates how much home you can afford and gives sellers confidence in your ability to obtain financing. This strengthens your offer.

Tips for Finding the Best Rental Property Mortgage

Follow these tips to secure the ideal financing for your rental property:

• Shop around – Compare quotes from several lenders to find the lowest rates and fees. Leverage online marketplaces like LendingTree.

• Ask about discounts – Some lenders offer discounts for buying multiple rental properties or having a prior relationship.

• Consider portfolio loans – Community banks and credit unions provide more flexible options.

• Improve your credit – Work on improving your credit before applying. Higher scores mean better rates.

• Make a larger down payment – Putting down at least 20% gets the best terms and avoids PMI.

• Lower your debt – Reduce credit card balances and other debts so you qualify for a lower rate.

• Pick the right term – Weigh pros and cons of 15 vs 30-year mortgages in terms of interest rates and payments.

• Deduct interest – Consult a tax pro to maximize mortgage interest deductions on your rental property.

Alternatives If You Don’t Qualify for Financing

If you don’t qualify for a rental property mortgage, you have a few options:

• Team up with an investing partner who can help fund the down payment.

• Consider house hacking by buying a multifamily home, living in one unit while renting the others.

• Buy a less expensive fixer-upper property that needs renovations to be rent-ready.

• Build up your credit, save more for a down payment, and lower debts before reapplying.

• Explore alternative financing options like private or hard money loans. These have higher rates but are less strict.

• Save up and make an all-cash offer, which is more attractive to sellers.

With some persistence and creativity, you can find a way to obtain financing even if you don’t initially qualify for a mortgage. Partnering up, house hacking, or using alternative financing can help you secure the funds needed to purchase your first rental property or add to your real estate portfolio.

The Bottom Line

Obtaining financing for a rental property requires more money upfront and stricter lending standards compared to a primary residence mortgage. But with a little preparation, you can get preapproved for a competitive rental property loan. Shop around, optimize your finances, and leverage the various mortgage programs available to investors. With the right strategy, you can secure financing to purchase a profitable rental property.