Loan conditions for rental properties
Number of properties – In the past, individuals were allowed to finance up to four properties (including their own homes). However, Fannie Mae has increased this limit
to 10 properties in 2009.
However, it is too early to rejoice. If you are about to get loans for a rental property, you will find that most major lenders will only grant you loans for up to 4 properties.
Credit Score – A minimum FICO credit score of 630 is required to obtain financing for leased properties. A good credit score of 745 or higher will increase your chances of getting a mortgage at a lower interest rate.
If you already own 4 properties, your minimum credit score is 720 before you qualify for your fifth loan. You can get your credit report (and score) from one of three credit bureaus.
Down Payment – Most lenders will require a minimum down payment of 20% for rental real estate investors. If you already have 4 or more properties, you will need to make a down payment of 30% to 50%.
Debt Ratio – In simplified terms, the debt ratio is the ratio of your total debt to your total income. For example, a person who has monthly debt payments of € 1,000 and who earns € 5,000 a month will have a debt ratio of 25%.
For most lenders, rental loan requirements will allow for a maximum debt ratio of 36 to 42%.
FHA Rental Mortgage Requirements
If a minimum deposit of 20% seems too difficult to manage or if you do not want to immobilize too much money, then a loan provided by the FHA is a good alternative to consider.
Essentially, an FHA loan is a mortgage insured by the government (the Federal Housing Administration to be more specific). If you ever default on your home loan, FHA will pay lenders for any losses.
This gives mortgage lenders peace of mind, allowing them to offer real estate loans with low down payments (as low as 10% for rental properties), lower mortgage rates and lower closing costs.
As you can imagine, an FHA loan has certain conditions and restrictions:
- The FHA mortgage limits limit the maximum amount of home equity loan you can borrow based on your state and county – you can check the FHA mortgage limits here.
- Once you have closed your FHA loan, you must move in within 60 days and live there as your primary residence.
- You are only allowed to rent the property after 12 months of renting
- You are only allowed to take one FHA loan per person (with some exceptions).
An FHA-insured loan will cost you 1% of the original home loan amount, plus a monthly fee for 5 years.