Buying investment real estate is a fantastic way to make money but qualifying for investment property loans can take time and effort. Getting a loan for your next investment real estate purchase is more complicated than getting an owner-occupied loan and will cost you more money.
Several banks consider investment property loans much riskier than an owner-occupied loans, so they often make it more challenging for investors to qualify. However, you can do several things to better qualify for an investment property loan as an investor. The primary financial aspects of qualifying for an investment property loan include the following:
- Your employment history
- Debt to income ratio
- Credit history and credit score
- Down payment
Let’s look into all these factors in more detail.
Your Employment History
If you want to qualify for an investment property loan, you must show proof of employment. It will show the lender that your income is secure. Just like in the case of owner-occupied home loans, you will have to show full-time employment and a steady income from one job for a minimum of 2 years.
If you are working part-time, on commissions, or tips, even if you have enough money to cover all the expenses of a rental property, you must be ready to show at least two years of employment history. Some banks may want to see 3 or 4 years on a job if your income is not hourly.
DTI (Debt to Income)
Using your debt-to-income ratio, a lender can easily measure your total debt against your income. Your DTI ratio is also critical in qualifying for investment property loans. If they feel like the real estate property is reasonably affordable for you, they will qualify you for a loan.
Debt to Income = Gross monthly debts / Total monthly income
Using this formula, you can find out what your total DTI is. Your monthly debts may include your payments for:
- Student or personal loans
- Credit cards
- Car loans
- Your current mortgage (if any)
The Loan You’re Applying For
To qualify, you need to have your DTI under 50%. 36% or less is the ideal DTI ratio which will help you explore several lending options. Some real estate lenders also allow you to factor a part of your estimated income from the rental property into your current gross income. However, it would help if you did not count on this. Moreover, being able to afford a rental real estate without any rental income is critical for your financial security in the long haul.
Credit History and Credit Score
To qualify for investment property loans, you need a sound credit history with a minimum credit score of 620. Though this is the minimum you need for approval, having a higher credit score will open you to better interest rates. If you have a bad credit score, you can do several things to help increase your credit score and qualify for a loan.
The top factors affecting your credit score are timely payments and revolving utilization. Keeping your credit utilization at around 30% and making timely payments each month can help you reverse your lousy credit. Moreover, having a long credit history can be difficult for new real estate investors to present. A lender will like to see a few years of sound credit habits before they approve your loan.
The last important factor affecting your ability to get a loan is your down payment. Since people are more likely to default on investment property loans rather than home loans, most lending institutions often ask for a significant down payment. If you are hoping to get investment property loans, you should be prepared to pay 20% to 25% of your total purchase price. They will also check out your bank statements and expect a high savings level. This ensures them even if you are not earning money from the property, you will still be able to make your payments on time.
All these signs indicate that a real estate investor is financially secure. These signs also show that you, as an investor, can easily manage your money, making lenders more likely to approve your loan. No matter which kind of loan you choose, the road to successful real estate investing starts with having the proper guidance. Our team from Real Estate Funding Solutions can help you find an ideal loan for your next investment property purchase.
Real Estate Funding Solutions Can Help New Investors Get Approval In No Time.
The Real Estate Funding Solutions professionals can help you find an ideal investment deal in no time. Our experts have years of training and experience in the field and can help you meet all your loan requirements. If you have any queries related to investment property loans or would like to apply for a loan, contact us at 855-913-8637 for assistance.