Black Square Lending compares Rental Property Loans vs. Conventional Home Loans
If you’ve taken out a mortgage for your primary residence in the past, you’ll find similarities in the process whenever you try to finance a non-owner-occupied property. With an investment loan, you’ll still need to fill out an application, verify your income and assets, and the lender will check your credit reports and scores.
But there are also some key differences you may experience when you apply for your first rental property loan.
1. Lenders are more stringent.
Loans for investment properties are inherently riskier for lenders than standard, owner-occupied mortgages. The probability of late payments and default on rental property loans are higher. When money gets tight, real estate investment loans usually aren’t at the top of someone’s priority list.
Imagine the following scenario. You’re a homeowner, and you owe the bank a mortgage on your primary residence. You also own a rental home, and you owe a mortgage on that property as well.
Now, imagine something changes in your financial picture. Your income decreases and your tenant stops making his rent payments on time. All of a sudden, you can’t afford to make the mortgage payments on both your primary residence and your rental property. So which mortgage do you choose to keep current? Many people will choose their primary residence.
Because of the increased risk involved with investment property loans, lenders may require you to jump through more hoops before they approve your mortgage application. For example, you might need:
- A larger down payment (commonly 20% or higher)
- More cash reserves (often three to six months per existing mortgage plus the new mortgage)
- Sufficient income to cover existing debts and a new mortgage (debt-to-income ratio, aka DTI, should ideally be at or below 36% for the best rates and terms)
- A higher credit score to secure better rates and terms (often 720 and up)
2. Interest rates may be higher.
Not only may it be tougher to qualify for a rental property loan than for a mortgage on a primary residence, but it’s generally more expensive too. Again, the pricing of your mortgage is directly related to the amount of risk the lender believes its taking.
Even borrowers with excellent credit scores may pay a higher interest rate on a rental property loan than they would on a traditional mortgage. How much higher? Rates can vary widely from lender to lender. It’s common to see interest rates between .5%-5% higher on real estate investment mortgages compared with standard residential mortgages.
For example, say you qualify for a 30-year fixed-rate mortgage at 4.5% interest for your primary residence. In this scenario, you might expect to pay around 5%–8.5% for a similar investment property mortgage.
3. Qualifying property types may be different.
According to Quicken Loans, an investment property typically needs to fit into one of the following categories:
- Single-Family Unit
- Multi-Family Unit
In general, you’ll need to stick with one to four-unit properties when you apply for a rental property loan. If you want to buy an investment property with more than four units, you might need to consider a commercial residential loan or an apartment loan as an alternative. Also, a good fit may be Black Square Lending Commercial CRE loan products.
4. Private mortgage insurance doesn’t apply to many rental property loans.
On the positive side, you often won’t be charged private mortgage insurance (PMI) for rental property loans. PMI generally doesn’t apply to investment property loans when you’re putting down 20% or more to secure a conventional mortgage. If your down payment is less than 20%, PMI might raise the cost of your loan.
PMI is a type of insurance that protects the lender in the event you borrow money but eventually default on your payments. Although PMI isn’t designed to protect you, you’re the one who pays for this insurance when it comes to conventional financing. The monthly insurance premium is usually added to your mortgage payment.
You could potentially save a lot by securing a investor property mortgage with no PMI for your rental property. PMI adds an average fee of 0.5% and 1% of your loan amount per year. So, on a 250,000 rental property, you might pay an extra $2,500 per year — potentially adding $208 to your monthly mortgage payment. Providing a 20%-25% down payment (as is the norm with many rental property loans) would likely help you avoid the extra cost of mortgage insurance.
Are you looking for fix and flip loans? Black Square is a fix and flip lender. We help you secure hard money construction loans from our hard money lender for rental property. When you’re looking for lenders for real estate investors, or private investor for real estate. We can provide rental property financing because Black Square is a rental property lender.
Are you looking for fix and flip loans?
Black Square is a fix and flip lender. We help you secure hard money construction loans from our hard money lender for rental property. When you’re looking for lenders for real estate investors, or private investor for real estate. We can provide rental property financing because Black Square is a rental property lenders.