If you're ready to seek out financing for your residential investment property, these five tips can improve your chances of success.
Have a sizable down payment
Mortgage insurance won't cover investment properties, so you need at least 20% down to secure traditional financing for them. If you can put down 25%, you may qualify for an even better interest rate, says Todd Huettner, a mortgage broker and president of Huettner Capital in Denver.
If you don't have the down payment, you can try to obtain a second mortgage on the property, but it's likely to be an uphill battle.
Be a 'strong borrower'
Although many factors -- among them the loan-to-value ratio and the policies of the lender you're dealing with -- can influence the terms of a loan on an investment property, investors should check their credit score before attempting a deal. It will have the greatest impact on a loan's terms.
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"Below (a score of) 740, it can start to cost you additional money for the same interest rate. Below 740, you will have to pay a fee to have the interest rate stay the same. That can range from one-quarter of a point to 2 points to keep the same rate," Huettner says.
The alternative to paying points if your score is below 740, obviously, is to pay a higher interest rate.
In addition, reserves in the bank to pay for all your expenses, personal and investment-related, for at least six months also have become part of the lending equation.
"If you have multiple rental properties, (lenders) now want reserves for each property," Huettner says. "That way, if you have vacancies, you're not dead."