Rental Basics in Sacramento>Question Details

Hazel0982, Renter in Concord, CA

What differences should I know about being qualified for a loan for a rental property?

Asked by Hazel0982, Concord, CA Thu Jun 14, 2012

Are lenders more strict in approving people for rental property? Do I need to even inform them, cause how will they later that the house will be a rental property? Will I have to pay a higher deposit? Will I be approved for a less amount? Etc...

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10
Great question.

As lenders, we all essentially adhere to the same guidelines.

Deposits are the same.

As far as qualifying, the max for a rental is 90% loan to value (10% down payment).
PMI is required on loans above 80% loan to value.

Conventional financing offers you the best rate.
You will need a 660 minimum Fico score.
Also if you are putting down less than 30% then the lender cannot use any of the rental income (on the new property if you had a tenant for example). You would have to qualify based on your income and your debts and with the new mortgage as well on the investment property.

Homepath is another good option. Same Fico and down payment requirements; however there is no appraisal nor mortgage insurance on the homepath product. Rates are higher because of this. Typically .50-.75% higher in actual rate than conforming 30 year fixed rate loans.
However, once you factor in not having mortgage insurance and given the fact that you cannot deduct mortgage insurance from your taxes, typically the homepath pencils out quite nice.

For more information on how to qualify, simply give me a call at 916-813-4003.
0 votes Thank Flag Link Tue Jun 26, 2012
It's not that much more stringent to qualify for a rental property, you just need 20% down. Rentals have the same loan limits as owner occupied properties. Give me a call if you would like to discuss. 858-922-7899.
0 votes Thank Flag Link Mon Jun 25, 2012
Hazel - Here's a new product you may want to know about if you're interest in owning rental property - AON Rent Protect. This program provides a cash flow safety net for residential investors. If your tenant can't/won't pay the rent, you can be reimbursed up to 6 month's lost rental income and up to $1,000 towards legal expenses. Coverage starts at a modest $250 per year and qualifying is quick and easy. For more information check out: http://www.aonrentprotect.com
0 votes Thank Flag Link Mon Jun 25, 2012
Hazel - we evaluate all the same information for rental property approvals as we do for primary residence loans, with the exception of ordering a rental survey (done by appraiser) to see what the property might rent for....

Though you should always convey your true occupancy intentions, if it's very apparent to either myself or the underwriter that you're purchasing the property as a rental (there's multiple areas ways to determine this), you'll need to submit a very solid letter of explanation as to why this should be considered a primary residence loan. Let me know if you'd like any further clarification about this, this is a very common question!

A few questions for you: Do you have any 'landlord experience'? And what research have you done along these lines?

Let me know if I can be of further assistance!

best of luck to you, Jeff M
0 votes Thank Flag Link Tue Jun 19, 2012
IAre lenders more strict in approving people for rental property?
Yes. but, appropriately so.
1. If you are a non-owner occupant loan applicant, the lender will be LESS strict on caring how close the rental property is to your workplace.
- Claiming to be owner occupant of a smaller, cheaper home that the one you now enjoy inn Concord while working in the bay area is a hard sell to a cautious underwriter.

Do I need to even inform them, cause how will they later that the house will be a rental property? Of course you have to answer the questions on the application correctly to the best of your knowledge belief and intent. Don't venture into the slippery slope of fraudulent behavior.

If you think that it is 95% likely quickly turn it in to a rental, that you will live in the home for less than a year, soon after purchasing; and only 5% likely that you will live there long term, then the right thing to do is pretty obvious: tell the truth, yo do not INTEND to occupy.


Will I have to pay a higher deposit? Yes, the benchmark down payment these days is 25%. You could pay additional interest expense and get a lower down payment. I don't advise it. That is pretty good. With 25% down you get leverage of 3 to 1. and could have a positive cash flow on most rental properties even in today's rising real estate investment market.
Three-to-one Leverage means that if property value increases by a modest 3% per year, the 3-1 leverage increase the appreciation only return on your $25,000 investment to $12,000 Add the value of appreciation to the positive cash flow, favorable IRS tax treatments, equity growth due to principal reduction of the loan balance from monthly payments, you could have a total return on investment of over 50%.

The numbers usually are not as good if you put less than 25% down or if you put more than 50% down.*

Each highlighted opportunity property should be analysed on its own merits, since every property is unique, though many are similar.

*The opportunity to buy cash for a quicker close and lower price and the funds saved on not paying loan costs, make a cash purchase sensible too.
0 votes Thank Flag Link Fri Jun 15, 2012
Jim Walker, Real Estate Pro in Carmichael, CA
MVP'08
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Hi there again Hazel...

I think some folks here have given you some good information but let me chime in with my 2 cents.

I think you originally thought about buying a home as an "owner occupied" and then rent it out... is that about right...?

You've also been told that if you are going to start this home out as a rental there are different down payment requirements and qualifying criteria etc...because they consider you an investor.

You don't say if you own a place now.

If you don't and you work in Concord, you could buy a home here with the "intention" of living there. That's an operative word... "intend"... there's a box in the contract.

I don't know of any time constraints other then the 1 year rule which requires you live there at least for that period...

Ok now.... so you buy the house, you move in and after a few months of commuting you decided you didn't want to live there. You then want to move back to Concord because you got tired of the commute.

By the way moving in... means moving in... turn the utilities on in your name... get your mail there...

Check with a lender regarding the miles away from your job for those rules... My first stop for you would be to contact more than Loan Agent to get their feedback.

If you already own a home, then there's no way you'll be able to get an owner occupied loan in my opinion... unless you decide to rent your current out and move in to the one you are buying here... I think you'll have to have a "rental agreement" in place on your current home.

There's lots of things to consider but the one thing you don't want to do is bump up against the rules when it comes to "lender fraud"...

I hope this helps...

Make it a great day...!
0 votes Thank Flag Link Thu Jun 14, 2012
Lenders are not more strict but evaluate it differently. The income derived from the property cannot be credited in total, but a portion may be in qualifying your ability to pay the mortgage.

The amount you're approved for in a loan has to do with your income, and your outstanding debt prior to securing this mortgage if you're buying as an individual rather than a business entity. Depending on the type of rental property, (duplex, fourplex, small apartment complex) they may, as I said, include existing rental income for the property, minus standard vacancy rates. I said all of this to demonstrate it's not the same as buying an owner occupied home....and all of these variables will be discussed with your lender.

As you are in Concord, I expect your plan for buying rental property would be different than someone living local. There's alot to discuss when buying rental property and the first is the loan qualification. Then I'd discuss more on locations, property management resources, and things like that. Good luck to you.
0 votes Thank Flag Link Thu Jun 14, 2012
Hi Hazel,
you will be asked to put a bigger down payment than a primary residence purchase and the interest rate may be a little higher (though not much higher these days) There are some investment property loans with down payments as low as 5%. Please speak to you lender about what options and requirements they have for investment properties.

Yes you need to inform them your intention is to rent out the property, it would be loan fraud otherwise, which is a federal offense. Also many of the bank owned sellers require buyers to sign a statement certifying the buyer will use the property as their primary residence for x amount of time, if you falsely state you are occupying the property, they can fine you big $$ and rescind the sale. Not worth the risk.
0 votes Thank Flag Link Thu Jun 14, 2012
Generally you will need to put down a larger down payment for a loan on an income property. There are also certain loan programs that will not be available to you as well as certain homes that will not be available to you initially. For example HUD homes and Fannie MAE homes typically give owner occupied buyers a "first-look" period ( typically 7 to 14 days).
As far as informing a lender that it is a rental home and not your residence, you must answer all questions and applications truthfully. There is also a section in the California Residential Purchase contract that asks if the buyer is planning on occupying the home. You run many risks if you misrepresent yourself to your lender and to your realtor. I won't go into them because it's just not worth it. Don't do it.
Your first step would be to talk to a Realtor and have them refer you to a good lender.
I specialize in single family income properties and would love to help you find one that works for you. Feel free to contact me with any questions.
Thanks,
Sam
0 votes Thank Flag Link Thu Jun 14, 2012
I will try to answer each question.

When purchasing a personal residence you will be stating that you will live in it for 12 months. Life does change, but it is the intent that is the most important. As for an investment purchase, yes you will need to put down more money. Typically 20-30%. Rates and/or cost will be sightly more (depending on down payments %) Banks will randomly check on houses to see if they are indeed owner occupied or not. Being approved for more or less, there are other factors that will go in to this. Do you have experience with being a Landlord.? Some banks will allow you to use the rents and some will not.

If you would like we could talk.

Call me at 916-257-3779

Thank you,

Jamie Collins
Real Estate / Mortgage Training / Insurance
0 votes Thank Flag Link Thu Jun 14, 2012
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