Basic Investment Property Loan Requirements

Posted on: January 15, 2012

Categories: Other Articles

Author: lbuen

4561376850 6f002abeb9 m Basic Investment Property Loan Requirements

Obtaining financing for an investment property loan often proves more challenging than taking out funding for a residential purchase. Besides your own finances, mortgage lenders will also scrutinize the property in question, particularly its appraisal, cash flow and profitability. To give you an idea of what to expect, this post will cover some of the investment property loan requirements that most lender require.

Investment Property Loan Requirements: Your Financial Standing

Down payment

You must have enough funds to make the down payment. Lenders are taking in greater risks when funding investment properties because such properties often come with huge price tags. To somehow cushion them from such risks, they often command higher interest rates. At the same time, they also require beefier down payments, which often start at 20 percent of the price with averages ranging between 30 to 45 percent. So take time to save up for this amount, or you can also opt to seek additional financing for this before you can secure an investment property loan.

Satisfactory credit score

Also make it a point to spruce up your credit record as this is another deciding factor. Just because your score made the grade for a residential mortgage does not necessarily mean that it will qualify you for an investment property loan. Credit requirements for investment property loans are often more rigid because of the greater risks involved.

Personal Income

Another one of the investment property requirements is to be able to show your lender that you have the wherewithal to fulfill your mortgage payments. So you need to prepare the appropriate financial documents to show your income and assets.

Investment Property Loan Requirements: The Property’s Financial Standing

Property appraisal

This investment property loan requirement serves to establish the market value of the property which includes that of the building and land. This is to help your lender avoid unwittingly providing funding that is more than how much the property is really worth as doing so only increases its risks. So expect your lender to survey the property and consider its location, size, plumbing, roof, and other systems.

Debt Service Coverage Ratio (DCSR) of the investment property

This is where you need to determine the monthly net cash flow you are expecting to generate from the investment property. The lenders will compare this figure with how much monthly mortgage payment you need to pay your lender. By computing this ratio, your lender will have an idea of how much monthly payment you can really afford for the property. Many lenders require a DSCR between 1:1 and 1:4. If your lender requires you a 1:4 DSCR, your investment property must be fetching $1.4 for every $1 that you pay for mortgage. This is to ensure that your rental income would be greater than your debt. This gives your lender the peace of mind that you can afford to repay the loan.

There may be more investment property loan requirements that your particular lender may ask for as these vary from one mortgage provider to another. Nonetheless, expect the ones mentioned above to be required. Take time to shop around and get to know the criteria of different lenders so that you will know what to bring into the negotiating table.

 Basic Investment Property Loan Requirements
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