What are rental property loans?
A rental property loan is a mortgage for a residence from which the borrower, as a landlord, intends to earn rental income. Generally, lenders consider rental property loans a type of residential investment property loan, with the property being a house, a condominium or a small multifamily building like a duplex, triplex or fourplex. Multifamily properties with more than four units are considered commercial real estate; if you want to buy a rental property with five or more units, you’ll need a different type of financing altogether.
What’s different about a rental property mortgage from a standard home loan?
Quite a bit. For one thing, lenders generally have stricter standards for rental properties than for primary residence mortgages, because of the amount of risk. Think of it this way: Say a borrower has both a primary home and a property that earns rental income from tenants. Suddenly, that borrower’s financial situation changes — maybe they lose their job, or their tenants move out — and they can’t afford to make the mortgage payments on both properties. Likely, that borrower would choose to prioritize paying the loan on their own residence before the rental property, resulting in more risk for the lender financing the rental.
Because of this, the qualifications for securing rental property financing are inherently higher than those for primary residences. Rates and terms for a mortgage for a rental property can be more restrictive as well. For example:
- Minimum credit scores for rental properties typically range around 740
- Rental property mortgage rates are usually higher (it’s common to see rates between 0.25% to 1% higher on rental property mortgages than standard residential loans)
- Private mortgage insurance (PMI) doesn’t cover rental properties, so downpayments are commonly 20% or higher for single-family rental homes and 30% or higher on multi-unit buildings
- Lenders will expect a debt-to-income (DTI) ratio below 36%
- Lenders will want to see proof of income for at least two years and a bare minimum of six months of liquid reserves
It may be possible to secure a rental property loan if you don’t meet the above conditions, but it will be reflected in less favorable rates and terms for the borrower.
What types of loans can I use to buy a rental property?
If you’re not planning on living on the property at all, you’ll have to seek conventional financing for your rental, available through many banks and independent mortgage lenders. If that’s the case, you’ll likely encounter the tighter qualifications listed above. Living on the property — in one of the units in a duplex, for example — opens you up to a few extra options.
For one, the Federal Housing Administration (FHA) offers multifamily financing for properties with four units or fewer, though the borrower must be occupy one of the units to qualify. FHA loans for rental properties, like those for primary homes, offer lower downpayments and accept borrowers with lower credit scores, but the borrower must live on the property for a minimum of one year. The Department of Veteran Affairs (VA) likewise offers financing for properties with up to four units, but the borrower must certify one of the units as their primary residence.
If you’re looking for funding for multiple rental buildings, you could also consider a blanket loan, which is a mortgage that liens more than one property. Don’t worry — Scotsman Guide can help you find a lender for those, too.
How to get a loan for a rental property?
With Scotsman Guide’s Lender Search, you’ll be able to find a suitable lender to finance a rental property and begin generating rental revenue in no time. Scotsman Guide’s database features hundreds of lenders who cater to every type of mortgage scenario, so chances are great that you’ll be able to find the right funding partner for your rental property loan.