How Do You Get A Mortgage For A Rental Property?
What is a Rental Property?
Rental property is a term used to describe real estate bought by an investor and rented out under a lease or contract. The goal of a rental property is to generate income for an investor, either through rent payments from tenants or through an increase in value upon sale. Residential rental properties are homes owned by investors that are leased out to tenants who life in the properties.
Getting a Mortgage for Your Rental Property
Obtaining a mortgage for your rental property may seem like a daunting task, but it can often be surprisingly simple. Like with any other mortgage, your lender will offer you a loan if your credit score, debt ratios, and current income are up to par. With rental mortgages however, you may also have to provide proof of tenancy or market rental rates. The amortization period for rental properties is often shorter than that of a typical mortgage, as investors can use rental income to pay the loan back at a faster pace.If you are applying for a residential mortgage, your purchase price is under CAD 1 million, and you live inside one of the units of the property, and the property has up to 4 units, you might be able to qualify with a down payment of 5-10%, depending on the purchase price of your property.
How to Improve Your Approval Chances
Before you can secure a mortgage for your rental property, you need to be approved by a lender. Here are a few steps you can take to improve your odds of getting approved:
Understand the Top Methods of Approval
Before approving you for a loan, your lender will want to verify your debt coverage ratio. Your debt coverage ratio measures your ability to pay off your mortgage debt using available cash flows. By understanding the two most common methods of approval, you can choose a lender that uses the method that is most advantageous to you and increase your odds of approval. These methods are:
Debt Service Coverage Ratio (DSCR) - This method is often used for commercial real estate investors who own at least five units. To calculate your DSCR, your lender will divide your net operating income by your annual mortgage payments. To get approved you want to have a ratio of at least 1.1, but the higher your score— the better.
Rent Inclusion - This method is most common amongst residential rental investors. It involves determining what percentage of your annual income will go towards mortgage payments. For this calculation, a percentage or the expected rental income will be added to your current income when making the calculation.
Prepare Your Documents in Advance
To qualify for a rental property mortgage, you must maintain a good credit score and demonstrate sufficient income, both from rental activities and from non-rental means. To increase your odds of approval, it is a good idea to collect and check over your documents before beginning your application, giving you time to amend any errors. You can check your own credit report for free ahead of time and should also take time to gather your lease agreement, rent roll, and your most recent notice of assessment, and any other necessary documents that may be required.
Work with a Mortgage Broker
In today’s mortgage market, many aspiring rental investors are being denied by big banks due to increasingly strict qualification standards. Rajan Saggi has worked with many institutional and private lenders to connect investment property buyers with the lenders. Getting approved for a rental property mortgage can be a difficult process, but Rajan Saggi is here to help.
Contact Rajan Saggi @ 604-767-5050 or info@rajansaggi.com to schedule a consultation!
<< Back