The world of real estate investing can be fun, exciting, and challenging. But, there’s a lot to know in order to create a wealth-building real estate portfolio to supplement your income or even provide financial freedom. It all starts with learning how to get a mortgage on an investment property so you can leverage someone else’s money to build your own wealth.
Let’s walk through the process together and look at 6 different things you’ll need to have or consider during the mortgage approval process.
6 Factors to Consider When Getting a Mortgage on an Investment Property
1. Credit score – If you’re looking to purchase an investment property as an individual, potential lenders will look at your personal credit score. On the other hand, if you’re an entrepreneur or small business owner looking to get financed for a rental property, lenders will be looking at your business credit score.
In general, most lenders look for a score of at least 620, while some will require a score in the 700s. Getting a mortgage on an investment property is similar to getting approved for a mortgage on your personal residence – the higher your credit score, the more likely you are to be approved AND the better the terms you may get.
2. Down payment – For the savvy investor, there are ways to invest in real estate with little or no money down. However, some lenders do require a down payment, typically in the 15-20% range. Your credit score can come into play here as well with a higher score often equating to a lower down payment needed.
3. Income – Banks are more than willing to write mortgages for well-qualified borrowers, or the people they think have the best potential for not defaulting on their loans. Whenever banks lend money to investors, they’re taking on risk, so they try to limit that risk as much as possible.
One way they do this is by looking at the income of would-be borrowers. If you show sufficient consistent, steady, predictable income, you’re more likely to get approved for a mortgage on an investment property. If your income isn’t high enough, or you’re self-employed with unpredictable income, it may be helpful to work with a business coach in your industry who can show you ways to sustainably grow your income and therefore, increase your investment potential.
Before you try to get pre-approved with various lenders, do your homework and gather proof of your income – tax records, profit and loss statements, pay stubs – whatever will best show how much you earn. Note: If you’re an entrepreneur, most lenders will require you to show proof of your last two years’ worth of income.
4. Payment history – This often goes hand-in-hand with your credit score. A high credit score typically indicates that even though you may have debt, you have a proven track record for paying your debt payments on time. A potential lender will look at your debt to income ratio to make sure that a new mortgage won’t get you in over your head. A high credit score, low debt to income ratio, and a great payment history will go a long way toward helping you get a mortgage on an investment property with ease.
5. Mortgage rates – Getting the best mortgage rate is essential for helping you save money, especially since the rates on investment property loans tend to be higher than those on a standard home mortgage. The more money you can save on the mortgage for one investment property, the more you’ll have available to put toward the purchase of another one! Do your due diligence and shop around for the best rates. Also note that the higher your credit score, the more likely you are to be able to qualify for a lower rate.
6. Hire a mortgage broker – Yes, working with a mortgage broker costs a small fee. However, it’s well worth it if they can do the shopping for you and help you secure the best rate for your investment property mortgage. You’ll pay the fee for the broker just once but your mortgage rate affects your payments for the entire life of your loan.
Get a First-Hand Account of How to Get a Mortgage on an Investment Property
When you’re learning something new, it’s often easier to follow in the footsteps of others who have gone before you and have achieved the goals you’re looking to reach. If you want to learn how to invest in real estate the right way, I invite you to work with me.
From multi-family homes to apartment buildings, my wife and I have learned how to get a mortgage on an investment property again and again, and we’re happy to share our secrets with YOU. We’ll show you exactly how we went from owning $0 in real estate to owning $5 MILLION in real estate by the age of 30. With the right knowledge and the help of someone who’s been where you are, YOU can be successful at real estate investing, too!