You can create an extra stream of revenue by acquiring a rental property. Chances are that you will need a mortgage when getting the property to finance the purchase. It is important to note that getting a mortgage for a rental property is not easy.
It is, therefore, important for you to understand all the factors that you need to consider when taking out a mortgage for a rental property. Mortgage rates have fluctuated in the recent past, going to their historic lows.
This means that it might be the right time for you to consider increasing your income revenues. However, before taking out that mortgage, here are a few things you need to consider and be aware of;
Debt-To-Income Ratio
Before taking out a mortgage for a property you plan to rent out, you need to calculate your debt-to-income ratio. This can be defined as your monthly ratio of income to the debts that you have. It calculates the amount of money from your income that is used to pay your debts.
To ensure that you qualify for a mortgage for a rental property, you should have a debt-to-income ratio of about 36% to 45%. When calculating this, you can add about 75% of the rental income to lower your debt-to-income ratio.
It is important to note that you should not factor in 100% of your rental income when applying for a rental mortgage. If this is your first rental property, then rental income might not be considered when applying for a mortgage.
Down Payment
When applying for a mortgage to buy a home, you might only be required to make a down payment of about 3%. However, this depends on the type of financing that you get. In other instances, you might be required to get private mortgage insurance to protect the interests of your lender.
When it comes to mortgages for rental property, there is no private mortgage insurance. This means that the down payment for a rental mortgage is going to be higher compared to that for residential homes.
For instance, most lenders will ask for a minimum of between 15% to 20% for you to qualify for a mortgage. Some lenders might even ask for more. If the rental property you are buying has many units, you might require a down payment of at least 25%.
Savings
Savings play a very crucial role in our lives, not just when applying for and paying your mortgage. When it comes to mortgages, savings are sometimes referred to as a rainy day fund. They help you during the “rainy” days.
Apart from proving to your lender that your income is sufficient to take care of your monthly debts, you also need to prove that you have saved enough money to keep you and pay your monthly debts in case something happens.
To be on the safe side, ensure that you have about four to six months of savings in a bank account. This should include payment for the mortgage with insurance, taxes, and interest for at least three months.
Credit Score
A credit score can be defined as a number ranging from 300 to 850 that is used when rating your creditworthiness. You should aim at getting the highest score possible, as this makes you appealing to lenders.
This number is based on your credit history, calculated from factors such as your repayment history, debt level, and the number of bank accounts that you have. Lenders will use this number to evaluate the possibility of you repaying your mortgage on time.
When buying a house you plan to rent out, most lenders will require a credit score of at least 620. Those with credit scores above 740 are most likely going to qualify for a mortgage with better terms and interest rates.
Personalized Guidance and Support From Your Mortgage Company
This is one of the most important factors to consider when taking out a mortgage on a property you plan to rent out. The truth is that there is no one-fits-all mortgage, or rather a mortgage that can meet the requirements of all applicants.
You, therefore, need a mortgage company such as www.loandepot.com that looks at your personal needs and offers personalized guidance and support through the application and repayment period. This is going to ensure that you get a mortgage that you can afford.
Buying a Rental Property
Buying a property that you plan to rent out can be beneficial especially because of the extra stream of revenue that it creates. It also plays a role in ensuring that you have financial security and yields tax advantages. However, if you are planning to finance the property with a mortgage, you need to consider the factors discussed above.
