If you’re looking to purchase an investment property, you’ll need to qualify for a mortgage. Investment property mortgages are different from traditional home loans. They can be easier or more difficult to qualify for, because they require entirely different types of proof in order to qualify. Here are five tips that will help you get approved for an investment property mortgage.
Know the Difference Between an Investment Property and a Primary Residence
The first step is understanding the difference between an investment property and a primary residence. An investment property is a property that will not be your primary residence, meaning you won’t be living there. This could be a rental property, a vacation home, or even just a piece of land that you’re hoping to sell in the future. On the other hand, a primary residence is the home where you live.
Cash Flow is More Important Than a Good Credit Score
Investment property mortgages are often given based on the property characteristics rather than just on the borrower’s credit score. Although a credit score is important, if you can prove the cash flow of the property is adequate you can still qualify for the loan. Even if your score is a bit lower, you may still be able to qualify for an investment property mortgage, but it may come with a higher interest rate. A good rental property will have a positive cash flow and thus could qualify for a mortgage. Raw land on the other hand will have zero cash flow and thus may not qualify. Vacation property will be somewhere in between. It may or may not have a good cash flow depending on how often you are able to rent it out. This should also be covered in your cash flow projections.
Have a Property Income Projection
Mortgage lenders want to see that you have done your property income projections before they give you an investment property mortgage. This is because they want to know that you’ll be able to make your monthly payments on time, without any issues. NewFi Lending puts it this way, a “Cash Flow loan qualifies you on your property’s expected rental income, not your personal income or debt which means you don’t need to meet income, debt, or employment requirements other financing options require.”
Show That You Have Cash Reserves
When you’re applying for an investment property mortgage, lenders will also want to see that you have cash reserves—money saved up in the bank that you can use in case of emergency. This shows them that you’re financially responsible and capable of handling unexpected expenses.
Get Pre-Approved for Your Mortgage
Once you’ve met all of the requirements above, the next step is getting pre-approved for your mortgage. This means that you’ll submit all of your financial information to the lender, who will then tell you how much they’re willing to lend you. Getting pre-approved for your mortgage is a great way to know exactly how much money you have to work with when searching for an investment property.
Investing in property can be a great way to generate extra income but only if you qualify for an investment property mortgage. These loans usually come with stricter requirements than regular mortgages, but if you follow these tips, you should have no problem qualifying!