Ways To Apply For A Rental Property Mortgage

by Smith Taylor on December 23, 2011

Two types of borrowers usually apply for rental property mortgages – speculative buyers and buy-and-hold type of investors. The requirements for institutional rental property mortgages differ from those for standard mortgages. This mortgage focuses more on the borrower’s net worth and credit rating, down payment, property appraisal, and the presence of renters. If the applicant has two or more rental units, financial institutions want to know how many of them are occupied at present.

Private lenders focus mostly on the property’s valuation. If the property you want to buy has an attractive location and excellent rent rolls, then you can secure a high loan-to-value. If you want to make improvements, a second mortgage is the solution if there is enough equity in your home.

Where to apply for a rental property mortgage? There are many mortgage lenders out there, but you may check with a traditional lender first. Bank mortgages are best suited for the purpose of long-term investment because banks usually offer the longest terms and lowest interest rates. Of course, you can approach hard money lenders, but many of them will require that you return the loan in less than one year. At the same time, it may not be easy to qualify for a mortgage loan from a bank.

With rental houses, financial establishments will normally lend up to 65 percent of the appraised value or purchase price, whichever of them is lower . Depending on the location and your financial situation, you may get up to 75 percent. If the amount you require is higher, you may have to insure the mortgage through the CMHC. You may be offered funds up to 85 percent if you have insurance with them. However, keep in mind that the insurance premium will be high or up to 4.5 percent of the amount of the mortgage loan. Your lender may also require that the property is to be used for residential purposes only.

Regarding other requirements, the money made from renting the property should cover most of the expenses. This includes mortgage payments as well. If the property cannot generate sufficient income to cover these expenses, the borrower should have financial resources to cover the short fall.

This one should be obvious, but once you are approved for a mortgage, the income your property generates should come from permissible and legal use of the latter. For example, if the property you purchase has an unauthorized basement suite, this means that the income coming from this suite cannot be included in the total income generated by the property. Therefore, it will not contribute to meeting operating expenses.

Finally, what is your best bet when choosing a property to invest in? Ideally, you should be looking for a good neighborhood with low vacancy rates. You will make more money by renting, attracting nice tenants.

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