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Buying Rental Real Estate? 5 Ways Investment Mortgages Are Unique

Admin • Jan 29, 2021
Investment Mortgages — Costa Mesa, CA — Secure One Capital
Do you want to purchase a piece of real estate to use as a rental unit? Many ordinary Americans have become landlords in recent years, earning a fairly steady side income that helps stabilize their financial future. But unless you have all you need in available cash, you'll need to get a mortgage for your new investment property.

And even though the mortgage may look the same as the one you have for your primary residence, it differs in important ways. Discover what you need to know about these differences and what you can do to conquer them.

1. You May Need a Larger Down Payment
Thanks to efforts to encourage home ownership among all Americans, many people can get a mortgage with low down payments. These can be as low as 3% of the mortgage amount.

However, investment property loans are typically much less generous. You should expect to need a down payment of 15% to 25%, depending on the type of property. While this may require some extra effort, keep in mind that it means lower monthly payments in the long run. That's good for your profit margin.

2. You Should Have a Higher Credit Score
Along with lower down payments, many homeowners can qualify for mortgages with fair credit scores rather than stellar ones. But you may need to do a little bit better to qualify for a rental property loan. The minimum credit score needed varies based on lenders, but it's often 640 or higher.

Before shopping for a mortgage, get started early on improving your score. Obtain a free copy of your credit report, and dispute any inaccurate items. Pay down debts that will have the biggest impact on the score. Raise some credit limits to reduce your percentage of use. And make payments before the date each debt will be reported every month.

3. You Should Prepare to Prove Income
Borrowers looking for investment mortgages might need to show more proof of income. Do you get significant money from another business, investments, independent contractor work, or family sources? Then, start gathering the best documents you can to show this income for the past two years. Even a traditional wage earner may need two or more years' of information.

4. You Might Need Lower Debt Ratios
Your debt-to-income ratio is important to qualify for any mortgage. But taking out multiple mortgages makes it complicated. Your current debts will be included along with the new mortgage. The best way to improve your debt-to-income ratio is to look at your credit score and pay off debts that will make the biggest percentage difference. 

The good news is that potential rental income can be included in these calculations. Determine the market rental rates for this type of property in your area, then add about 3/4 of this monthly rate into your overall income. This mitigates the debt increase from having two mortgages.

5. You May Need a Financial Buffer
Finally, landlord businesses are in a unique position in that they may go a month or two without any rental income when between tenants. To weather this possibility, lenders like to see the borrower have cash tucked away for a rainy day. Your goal should be to make sure you can cover the mortgage (and utilities) for up to six months in case of emergency. This will protect your new business too. 

When you know in advance what different steps you may need to take to qualify for an investment property mortgage, you can plan ahead and get started early. This way, you'll be in a position not only to qualify but to qualify for the best rates when you go shopping for a loan. 

Learn more by consulting with the investment property pros at Secure One Capital Corporation. We will walk you through all the steps to find a loan that's right for you.

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