How to Get a Mortgage for a Rental Property

Getting a mortgage for a rental property involves assessing the financial situation, researching loan options, preparing necessary documents, and understanding the underwriting process.

If you're considering investing in a rental property, the first question you might have is how to fund it. For most people, the answer to funding a rental property is the same as for their primary residence: You'll get a mortgage. While you might need to put more down, and interest rates remain historically high, an investment property with a mortgage can still create positive cash flow. Read on to learn what you need to consider to get a mortgage for a rental property.

Understanding Rental Property Mortgages

Rental property mortgages are equivalent to any second — or third or fourth — mortgage. Real estate investors can get up to 10 mortgages under Fannie Mae guidelines. Your second mortgage could be just the beginning. 

The primary difference between the mortgage on your primary residence and any additional mortgage is the down payment. For a rental property, you may need to put down 10% to 20% or close to it. Interest rates may also be higher than your primary residence or those offered to other homebuyers. 

Should you get a rental property mortgage? If you run the numbers and see the possibility for positive cash flow with the current rental market, owning a rental property can be a powerful way to earn a little money now while building asset value over time. 

Types of Loans for a Rental Property

Borrowers have options when it comes to rental property mortgages. You can usually only use government-backed loans like Federal Housing Administration (FHA) loans, Veterans Affairs (VA) loans and U.S. Department of Agriculture (USDA) loans for your primary residence. The notable exception is if you are buying a multiunit property and plan to live in one of the units. 

For rental properties, you can get conventional mortgages and jumbo loans. You might be able to use a home equity line of credit or home equity loan if you already own a home. 

For conventional mortgages and jumbo loans on rental properties, you can expect to pay 10% to 20% or more for the down payment. The best current jumbo mortgage interest rates are just over 6%, while conventional mortgages are over 7%. Find the best current conventional mortgage interest rates here. 

How to Get a Rental Property Mortgage

If you're ready to apply for a rental property mortgage, here's what you may want to consider:

Assessing Your Financial Situation

Before applying, it's important to be realistic about your financial situation. Evaluate your personal finances and consider assets, total debt, and debt-to-income ratio. Those are numbers that lenders will look at. Generally, they look for a borrower to have a debt-to-income ratio below 30% before they apply for a new mortgage. 

Debt-to-income ratio is the relationship between total monthly debt repayments and total income. Lenders look at the ratio — expressed as a percentage — of a loan applicant's monthly gross income that goes toward paying debts. In some cases, the percentage also includes total monthly expenses. For example, if you earn $10,000 per month and have $2,000 in debt repayment, your debt-to-income ratio is 20%. 

In addition to assessing current income and expenses, you can add potential rental income based on market research to show lenders. This can factor into the total debt-to-income ratio and improve cash flow. 

Researching Loan Options

Once you understand your eligibility and financial picture, it's time to research loan options and lenders. Don't be afraid to apply to multiple lenders and get prequalified to secure the most favorable terms. And remember that you can negotiate when you have multiple offers.

Preparing the Necessary Documents

When you're ready to apply for a mortgage, you'll need to submit standard documents. These include:

• Government-issued ID
• Social Security number
• Tax returns
• Bank statements
• Proof of income such as pay stubs or W-2s
• Rental property details
• Projected rental property income
• Gift receipts (if applicable)

Plan to collect all necessary paperwork in advance to streamline the application process.

Finding the Right Mortgage Lender

Shopping for the best lender specializing in rental property mortgages can't be over-emphasized. Evaluate lenders based on their expertise, interest rates, customer service and responsiveness. You can look at online customer reviews and Better Business Bureau (BBB) ratings and ask for referrals for customer experiences. 

Applying for a Rental Property Mortgage

The step-by-step process of applying for a rental property mortgage includes:

• Filling out the application
• Submitting documentation
• Undergoing a credit check

Being prepared and organized can help to ensure a smooth application process. Keep in mind that you may apply for preapproval with basic information like your name and Social Security number before applying for final mortgage approval with the lender who has the most favorable terms. 

Understanding the Underwriting Process

Underwriting is the process through which a lender takes on financial risk for a fee. In the case of mortgage lenders, the risk typically involves certain types of mortgages.

Lenders use underwriters to evaluate total risk through the application, the applicant's creditworthiness, and other potential risks. Common factors that can impact the underwriting process for a rental property are your credit score, debt-to-income ratio, total income, and the property's cash flow potential.

Closing the Mortgage and Beyond

When you're ready to close on a property, you'll need to pay the closing costs, sign the closing documents, and finalize the mortgage agreement. Before signing, carefully review all documentation and consider having a lawyer check the contract and terms to understand all financial implications. 

After closing, the real opportunities begin. You'll need to make a plan for managing the rental property, finding tenants, and ensuring a positive cash flow. Consider whether you will hire a property manager or manage the property yourself. Price the property at or under comparable properties in the same area, and plan how you'll screen tenants to increase occupancy and protect the property. 

Securing Your Investment Property

While mortgage rates rise and fall, under-market-value properties are always available for investors willing to do in-depth research on target markets. If you want to build your investment portfolio through rental properties, you'll need to run the numbers, create realistic cash-flow projections, and consider taking the next steps to create a rental property business. 

Frequently Asked Questions