Can I Qualify for a mortgage for rental property?

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Qualifying for a mortgage on a rental property isn't terribly different from qualifying for your personal home. The loan guidelines are a little tougher because the risk of default is higher. In a financial crisis, people are more likely to pay the mortgage on their home than the mortgage on their rental.

You can't use a government loan - FHA, VA, or USDA - to purchase an rental property. Thus, we're looking at conventional loans - Fannie Mae or Freddie Mac - or non-conventional sources. This article only covers conventional sources.

First, let's distinguish between residential and commercial investment properties. Basically, a residential rental is a building with one-to-four residential units. Anything else is considered commercial.

So, let's look at different loan guidelines that apply to investment properties.

The most distinct difference is the required down payment. The min down payment to purchase a rental property is 15%. If the property has multiple units, the minimum down payment is 25%. When refinancing a rental, you must have at least 25% equity in it.

Another significant difference is that you must have reserve funds. Reserve funds are extra assets that you must possess to cover unexpected situations, such as a long period of vacancy. The funds don't have to be liquid. They can be investment or retirement funds, but you must be able to document possession of them.

The amount of required reserves depends on several factors, including the number of financed properties you own and your credit score. However, you can use these basic guidelines. Fannie requires reserves equal to 6 months of housing payment (including taxes, insurance, and HOA dues, if any) for the property you're buying plus between 2% and 6% of the remaining balance of your other financed residential properties (except your primary home). Freddie requires between 2 months and 6 months of housing payment for all your financed residential properties.

It may surprise you, but the minimum credit score for rentals is the same as for any other home purchase, currently 620.

If you already own rental properties, you cannot qualify for a conventional loan if you currently own 10 financed residential properties. The limit includes all residential properties having a mortgage on which you're personally obligated, not just those having conventional mortgages. Commercial and land loans don't count towards the limit.

Both Fannie and Freddie require you to personally sign the mortgage. However, Fannie will allow you to transfer the property's title to an LLC after closing, which many people consider smart financial planning.

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