Purchasing a home in order to rent it out to tenants is a common investment strategy. You're able to use the tenants' rent payments in order to pay off the mortgage, so you'll slowly build equity while spending very little of your own money each month.
However, qualifying for a rental property loan is more difficult than qualifying for a mortgage on a home that you plan to live in — lenders know that when homeowners run into financial difficulties, they're more likely to default on a rental property rather than the home that they actually live in. This increases the risk to the lender, making it more difficult to qualify. Thankfully, there are a few strategies that you can use to make it more likely that a lender will approve the loan. To learn about four ways you can boost your chances of being approved for a rental property loan with a low interest rate, read on.
1. Save Money for a Large Down Payment
One of the best ways to secure a rental property loan with a great rate is to increase the amount of money you put down on the property. When you're trying to get a loan for a rental property, a down payment of around 20% should be considered the minimum in order to have a good chance of being approved for the loan. Paying more than this amount will reduce the interest rate on the mortgage since it makes the loan less risky for the lender — if you have a lot of personal money tied up in the property, the lender will feel like you're less likely to simply default on the mortgage and let them foreclose on the home if you run into financial difficulties.
2. Have Cash Reserves in Your Savings
In addition to allowing you to make a larger down payment, saving more money also allows you to build up a sizable cash reserve. Lenders will want to see that you have an ample amount of money in savings before they'll approve you for a rental property loan. If the rental property is vacant for a few months, the cash reserves will allow you to make monthly payments on the mortgage until you can find another tenant. This means that the mortgage is less risky for the lender, which makes it more likely that you will be approved for the loan.
3. Hire Property Management Services
If you don't have much experience renting out homes to tenants, it's a good idea to hire property management services to rent out the home for you. Property management services find tenants, collect rent and handle tenant complaints on your behalf, making it easy to rent out a property even when you haven't done it before. More importantly from the lender's perspective, property management services also handle all of the property's maintenance needs, including both routine and emergency maintenance. Lenders want to ensure that the property is maintained well since that helps it retain its value. Having property management services rent out the property will make lenders feel more comfortable with giving you a rental property loan.
4. Pay Off Your Existing Mortgage Beforehand, if Possible
If you're fairly close to paying off the mortgage for the home you live in, you may want to pay it off fully before searching for a rental property loan. You'll only have the mortgage payment for the rental property to worry about, and it can be financed by the tenants in your property — this makes lenders much more willing to lend to you. In addition, paying off your current mortgage also helps reduce your debt-to-income ratio, which makes it easier to qualify for a rental property loan.
Overall, the steps you need to take in order to boost your chances of securing a rental property loan are mostly the same steps you need to take in order to be approved for typical mortgages. However, finding a low rate becomes much more important when you're planning on renting out the home that you purchase — lower interest rates mean lower monthly payments, which means that you can charge less rent and still receive income from the property while building equity. Charging less rent makes your property more competitive in the rental market, allowing you to find tenants more easily. Above all, make sure that you shop around multiple lenders to find one that offers you a rental property loan with the lowest monthly payments.Share