Financing programs for rental properties will require more down payment and higher rates. Why?
At its most basic level financing a rental property is not much different than a primary residence as it relates to income, assets, credit and the like.
Financing programs for rental properties will require more down payment and higher rates. Why? Because when someone finds themselves headed into some degree of financial stress, the last thing they want to give up is their primary residence. When push comes to shove, the rental properties will be off-loaded first, securing the primary residence as a place to live. Financing the first requires more documentation, but after that, financing a second and third rental is easy-peasy in comparison.
With an initial rental, buyers must be able to comfortably afford the new purchase along with their current mortgage. Lenders use the mortgage payment on the new property which includes principal and interest, taxes and insurance in addition to what they’re currently paying on their current home. That might sound a bit unfair at first because a rental property typically generates enough income each month to more than cover the costs of ownership.
Otherwise, real estate investors might pass on a unit that doesn’t cash flow. The new property turns into a monthly expense instead of monthly income. Ultimately it means qualifying with two house payments even though the income is there, it’s just that lenders won’t consider it. But things change with the next rental property.
With the subsequent unit, the income generated from the home can in fact be used to help qualify. That is after two years have passed. Why the time test? Lenders want to see the owners can properly manage the property, keep it rented and maintained. Being a landlord means extra work. After the first year or so of ownership, some first time investors find out that managing the property is simply too much work.
If after two years have passed, the income can be used. Now there is effectively just one mortgage payment, the primary residence. The second rental unit mortgage payment is not only offset by the rent coming in each month but providing the owner with some additional income at the same time.
When investors discover this underwriting guideline for a second rental, they may decide to acquire a third or fourth. Qualifying for the second unit and beyond is much easier due to the fact that lenders will use the additional income.
In fact, it’s not uncommon for investors to own multiple rental units because it’s so much easier to qualify for the subsequent purchase. When an investor does own several rental units, a property manager is essentially a must. It can also be the case where investors who own multiple units decide the ‘working world’ isn’t worth it any longer and instead own, manage and maintain their units and live off the rent.
There’s a little math involved when considering a rental purchase but not very much. If there’s a positive cash flow, then it’s time to submit an application and get the preapproval process moving forward. You’re then likely to begin looking for the next property. Yet the approval process will be much easier.
