While rental property financing shares many similarities with securing a mortgage on your primary residence, there are some big differences. Rental properties cost more to maintain than owner-occupied homes and have the potential for negative cash flow if the 아파트담보대출 property is not performing well.
As such, lenders typically place more emphasis on DSCR and cash reserves when financing rental properties.
Credit Score
As a renter, your credit score is important to a landlord and may factor into their decision to approve or reject your application for a rental property. However, state and federal housing laws limit the criteria that a landlord can use to evaluate a tenant, such as credit reports.
When reviewing rental applications, some agents will perform soft credit inquiries to check a prospective tenant’s credit. These inquiries don’t impact a prospective tenant’s credit score, but they do require personal information such as their name and address.
Landlords can also help prospective tenants build credit by encouraging them to pay their rent on time, which can be reported to credit agencies. These reports can positively influence a tenant’s credit scores. However, most landlords consider more than just a prospective renter’s credit to decide on rental agreements. They look at their income, goals and risk tolerance when making the final decision. This can be difficult for a prospective renter with a low credit score to overcome.
Debt-Service Coverage Ratio (DSCR)
DSCR is an indicator of whether or not your property has enough cash flow to cover its debt payments each month. It takes into account your loan principal, interest, taxes, insurance, and association dues to determine how much rental income is needed for a positive DSCR.
Lenders use the DSCR to help them predict a real estate property’s profitability. They’ll also review the property’s value and market rent to ensure that it can support your loan.
Lenders will require you to provide bank statements to verify your funds and verify that the DSCR loan amount is in your name (or an LLC). They’ll also want insurance on the property to protect their investment in case of damage or theft.
Cash Reserves
While rental income should cover your monthly operating costs, you’ll also need money set aside for expenses that aren’t monthly, such as insurance deductibles or large, one-time repairs. Seasoned landlords usually have a reserve account that they keep in the bank to fund these expenses.
Lenders will consider your reserves to ensure that your investment property can cover the mortgage payment even when it’s not occupied. In addition, the reserves will help reduce your risk of a loan default.
The state of the economy also impacts your rental property’s demand and vacancy rates. When the economy is bad, you’ll likely find it more difficult to rent your property and may need to dip into your reserves.
Lenders may require you to demonstrate additional cash reserves for government-backed loan programs, as well as for larger multi-unit properties and high DTI loans. You may be able to offset these requirements by having a higher credit score or by contributing a larger down payment to your purchase.
Owner-Occupied Property
When it comes to the occupancy type of your rental property, your choice may affect your mortgage financing options. Owner-occupied properties qualify for more favorable loan programs than non-owner-occupied investments.
This is because banks see owner-occupied borrowers as less of a risk since they have regular income that can support their mortgage payments. On the other hand, investment borrowers often have inconsistent or no income and may default on their monthly mortgage payments.
For this reason, lenders tend to view investment properties as a higher-risk and therefore charge them higher interest rates. In addition, investors typically face additional expenses for property management fees and landlord insurance.
For these reasons, it is important to choose a neighborhood that is safe and desirable. This can increase the appeal of your rental property and make it more likely that you will rent it out to tenants. It is also a good idea to consider your own personal preferences and lifestyle when choosing a neighborhood and property.