An Introduction to Mortgage Financing for Rental Properties
2016-05-12 | 14:14:50
You want to buy a rental property, exciting! This means that the dwelling you purchase is for the sole purpose of generating rental income.
To qualify for rental mortgage financing, you will need to prove through documentation that the revenue from the property will cover the majority or all of the operating expenses of the property (mortgage payments, utilities, taxes, etc.). If the income from the rental will not cover the majority then you will need personal documentation as well that shows you will be able to cover the remainder. This implies as well that you need to have a very strong credit score, or a higher interest rate will be applied. Also to qualify, the property needs to be legally permissible as a rental.
Once you have determined that you and the dwelling are ready for an income property it’s time to secure the necessary financing. Typically, a financial institution will lend 65%-75% of the purchase price. This means that you need a minimum of 25% of the purchase price as a down payment. The amount they agree on will depend on your personal financial strength and the location of the property you’re purchasing. If you are seeking closer to 75% being covered then you will most likely need to go with a mortgage insurer, any high will result in a very high interest rate. If you are looking at securing a down payment elsewhere or renovating your new investment to encourage a higher income, you may consider obtaining necessary funds through a home equity line of credit.
So there you have it, an extremely quick introduction to the world of mortgage financing for rental properties. If you are interested in making a property investment, see a mortgage professional so they can help you prepare. As always, we here at AC Lending are happy to answer any questions and lend a hand.