The rules for buying a home as a rental property has undergone several changes. Even a few years ago, no down payment was required to purchase an investment property. In addition to this, mortgage loans were available at attractive rates to finance an investment property. However, nowadays, it is really tough to obtain the necessary financing to purchase a rental or investment property. The doldrums in the property market and the credit crisis, made the lenders more skeptical while offering a mortgage loan to a borrower. Now, its really tough to arrange the necessary financing to buy an investment property. However, though it's tough but it's not impossible to obtain the necessary financing. By following these tips, you can increase your chance to get the necessary financing -
1. Make sufficient down payment
If you purchase a rental house where you won't live in, then you are required to make a huge down payment. In order to secure traditional financing for a rental home, you are required to make a down payment of at least 20%. If you can make a down payment of 25%, you can secure a better rate. Again, in case you are purchasing in a higher-risk area or buying a condo, then you need to make a higher down payment.
2. You should have flawless and strong credentials
Your strength as a borrower determines your eligibility to obtain the necessary financing to purchase a rental home. Your loan to value (LTV) ratio, credit score and the policies of the lender are some of the important factors that influence the terms and conditions on an investment property. You should check your credit score before planning to purchase a rental property. In order to obtain the necessary financing to buy a rental property, your credit score should be at least 740. In case your credit score is below 740, you have to pay some additional money to keep the same rate of interest. Otherwise, with a credit score below 740, you have to pay a higher rate of interest. Apart from these, your income, assets, debt situation etc are taken into consideration before making an offer to you.
3. Don't try to get the loan from a big bank
If you are not financially in a position to make a huge down payment, then it would be wise to contact a small local bank, instead of contacting a big bank which has national presence. Big bank will not offer any kind of flexibility in terms and conditions of the loan. On the contrary, local banks may be relatively more flexible in terms and conditions. Moreover, local banks are more knowledgeable about the local market and are more interested in investing locally.
Before purchasing an investment property, first of all, you need to conduct thorough research on the property. Before going for riskier sources of funds, you need to be sure that the property is worth of purchase. In case, you are sure that the property has huge investment potential, you should arrange the down payment money from riskier sources also.