If you’ve ever purchased or refinanced a home you likely have first-hand experience on just how elaborate the process can be. Certain lenders may follow Freddie Mac’s guidelines, others Fannie Mae’s, while portfolio lenders may have their own set of underwriting criteria. There really is not a “one size fits all” checklist of guidelines when it comes to financing investment homes. Yet, there are some common themes which most lenders tend to follow. Below is a list of some of what you can expect during the rental property loan process.
Preparation – Like with any residential home loan, lenders are going to want to see proof of income, employment, and review a borrower’s credit history to ensure the applicant is in good financial standing and will have a solid chance to remain so. Be prepared to document several weeks or months worth of pay.
Paystubs should include the date range of pay (ie. day-month-year to day-month-year). For self employed borrowers, two years of tax returns is the norm. If you plan on using rental income to help qualify, you’ll likely need to show that income in your tax returns. Basic rule of thumb…if it’s not reported, you’re likely not going to be able to use it.
Down Payments – Back in 2005 there were lenders out there who where offering zero down investment property loans. Fast forward to 2011 and most lenders now require at least 15% down (see Fannie Mae Purchase Guidelines 2011). The majority of the lenders that we talked to for this article stated that they require 25% down for purchases and no cash-out refinances.
Credit Score Requirements – Credit guidelines will vary between lenders. According to Fannie Mae’s 2011 product matrix, borrowers must have credit scores of at least 680 for the purchase of a single family investment property if they are putting down 15-25%. If they are putting down more than 25%, 620 is the floor. For other investment property scenarios most of Fannie Mae’s minimum credit scores fall in the 660-700 range. You’ll need to consult with a licensed mortgage professional to verify credit requirements.
Number of Units – Both Fannie Mae and Freddie Mac will finance residential investment properties with 1 to 4 units. Guidelines for 1 and 2 unit properties are often less conservative than those for 3 and 4 unit homes. Often times the greater number of units corresponds to higher credit score requirements and larger down payments. Anything over five units is typically considered a commercial property and a commercial financing instrument would be needed. Commercial loans tend to have more conservative lending guidelines than those applied to residential loans. Because many lenders portfolio their commercial loans, there can be a greater potential for more creative financing options.
Using Existing Rental Income to Qualify – Various lenders will have different criteria on how rental income may count. Many lenders require a two year rental history, and the income must be reported in a tax return. Obviously if a person is seeking to purchase a rental property this is not going to be an option. There are lenders out there who may count rental income if a buyer has a signed lease and has collected a security deposit and one month’s rent. Sounds tricky, it can be.
Financing rental properties can be more intricate than what you might expect from buying or refinancing a primary residence. The good news is that there are plenty of lenders, brokers, and banks out there who are ready, willing, and able to assist buyers and rental property owners. Contact a licensed and reputable mortgage professional in your area to gain greater insight into what it takes to buy and refinance investment properties in today’s marketplace.
Nat Criss is a marketing professional with CMG Equities, LLC, an online mortgage rate research web site where consumers can learn about a variety of home loan programs including investment property mortgage financing and rental property mortgage loans.