Even if you are a seasoned real estate investor, it’s a good idea to understand why rental property loans are different than owner-occupied single family loans.
To keep it simple, it all comes down to risk. Lenders and those who invest in mortgages consider loans on rental properties to carry more risk than loans made on homes that will be occupied by the borrower. Historical data suggests that in times of trouble, property owners become delinquent on their rental properties before they do on the homes they live in.
As a property owner, it’s not always easy to understand why all loans of this type of property are lumped together in the same “risk bucket” since some rental properties are less risky than others. Some are in very desirable locations, have more equity and stronger tenants. But, it’s best to be prepared for what the general marketplace has to offer for these types of loans.
Here are three things to note when shopping for a new loan to purchase or refinance a rental property:
1. Pricing – since these loans carry more risk, the terms are not as good as those available on owner-occupied single family homes. You can expect the rate and total fees on rental property loans to be a little higher. As always, for lenders and investors, it’s about risk and return. Don’t expect to be offered the same terms on your rental property that you received on the home you own and live in, even if you have perfect credit, employment history, strong qualifying income and a large amount of savings. But there are usually some very good options available to you.
2. Qualifying – lenders have different qualifying standards for these types of loans. The combination of a really good credit score and a lower loan-to-value (equity) can make for an easy loan approval and better pricing. Using a “No Doc” program can reduce the amount of documentation and speed up the process.
3. Guidelines – although these guidelines are different, there are still many loan programs that allow less documentation, larger cash out amounts, larger loan amounts and lower credit scores.
There are very good options for financing rental properties right now. Agency programs and No Doc programs are still available for 1-4 unit rental properties. Interest rates are low and the general credit market is improving.
Since 1991, Brian and his team have funded thousands of Real Estate Loans. You can reach Brian at 800-607-1941 x220 or bbush@slglends.com
* 1-4 unit investment property and apartment building loans offered nationwide except in: Arizona, Florida, North Carolina, North Dakota, Nebraska, New York, New Jersey, South Dakota and The District of Columbia.
