What does it take to qualify for a loan on a rental property?

[thedarkwolf]

I've been day dreaming about buying some rental property for awhile but I am not exactly rich and already have one mortgage to deal with. How do they figure out how large of a loan you can get? Is it all based on my income or do they atleast look at how much the property rents for?

Houses here are dirt cheap. I clear $1200 a month after taxes which isn't a lot but it goes a long way here. I have no car payments and my current house payment is $340 so I have some extra cash every month. This two unit house just as an example I could afford to make the payments on without tentants if I had to. It would be really tight after I pay everything but I think I could do it without going in the hole. Two units at lets say $400 + utes a month one would pay the mortgage, taxes, and city fees and the other would go toward maintenance and me. I think a 3 or more unit place would be the way to go but there aren't any decent cheap ones rightnow to use as an example. That place actually looks fairly nice and is in a nice area. Even if I could qualify I am not sure I would want to deal with the hassle.

Anybody on here have a rental property and is it really worth the hassle?

 

[Linflas]

From what I understand it is the same as any other mortgage so your income as is would have to cover the mortgage. I don't believe they will consider the potential rental income as part of the process.

 

[thedarkwolf]

Well if thats the case then it will be awhile before I can qualify unless somebody dies and leaves me some money . Thats pretty much what I thought. If it was the other way everybody would own rental property.

 

[MikePanic]

they consider your current debt (credit cards, cost of living, existing mortgages, student loans, etc) based on your past work record and how much you've made over X amount of time, where X is differant from year to year

your credit rating also plays a major factor - this is determined by how old you are, how long you've had credit cards, how long you've used them and floated a balanced, any late fee's on them - including cell bills and gas cards, the number of credit cards, your single/married status....

any good realtor can get your credit rating for you and off that alone should b able to tell you if you can afford the place

the question is - only clearing 1200 month - 340 for your current payment - another 200 or so for cost of living (gas, food, clothes, entertainment, electric, water, trash, etc) - have you been able to save up 5-10% down money?

 

[thedarkwolf]

Originally posted by: MikePanic

the question is - only clearing 1200 month - 340 for your current payment - another 200 or so for cost of living (gas, food, clothes, entertainment, electric, water, trash, etc) - have you been able to save up 5-10% down money?

Did I mention I have no girlfriend or much of a life ? I don't have any problem saving up money for a downpayment. $1200 a month goes a long way when the only debt you have is a $340 a month house payment. I would want to save up a couple thousand more then the downpayment just for emergencies and that would be awhile. Well just messing with a Home affordability calculator if I could come up with a $5k down payment I could barely swing that house. Banks probably don't use the same calculator for a rental property as for a house though.

 

[Garet Jax]

The first rental property is the most difficult to qualify for (as long as you are renting the other ones).

The biggest thing most mortgage companies look at are:

1) Debt to income ratio
2) Loan to Value
3) Loan risk

1) Take all your debt (monthly payments) add it up. Take all your income add it up. Divide the total debts by the total income. Any more than 40%, you will probably have a tough time qualifying.

2) On investment properties, mortgage companies don't like to have a high LTV. Most are comfortable with 90% (ie you mortgage 90% of the total value of the property). There are many ways to get to this number without putting down 10%. I have found somee mortgage lenders that will do 95% or even 100% LTV loans, but you are paying premiums on rates and points.

3) This is an overall view of how likely you are to default your loan. One of the previous posts addressed this well.

Number (1) is typically the most difficult to achieve. In order to do so, you need to pay down your debts or increase your income. Once you get the first property, the gross rental income for that property is added to your monthly income (gross not net). This makes it much easier to get additional rental properties.

 

[thedarkwolf]

Thanks Garet thats a helpfull post.

There are a couple houses I could probably quallify for rightnow if I didn't mind having property in the middle of crack whore city but I don't think that would be a wise investment. I would atleast like to stick to upper lower income areas. If I went for single family houses I would have a lot more options as well but I think thats a little to risky and the house payment to rent income would be lower.