What is a Rental Loan?

A rental loan is a type of loan that real estate investors will apply for when they are seeking financing on a long-term buy and hold rental investment. Investors interested in becoming a landlord will pursue a property that they can purchase and keep as a rental. Rental properties come with the potential for earning monthly cash flow from tenants, building wealth, appreciation, and expanding one’s portfolio of investments.

Consolidating higher rate loans to a lower rate and single mortgage is easier to track and manage. Lending decisions are based on expected Property Cash Flow. Calculating a Debt Service Coverage Ratio (DSCR) aids the lender in determining if a property will generate enough income for loan obligations. Gross Monthly Income / Principal, Interest, Taxes, Insurance and Association Fees provide a good range for loan consideration.

Whether an investor is looking to purchase the property or refinance an existing one, it is important to understand the particulars of a rental loan.

Who Can Be Eligible for a Rental Loan?

Each lender will have different restrictions on the borrower and their business corporation. For example some lenders may accept the following as possible loan applicants.

  • S. Citizens
  • Permanent Resident Aliens
  • Non-Permanent Resident Aliens
  • Foreign Nationals
  • LLCs (Limited Liability Corporations), Limited Partnerships, General Partnerships, & Corporation

What are the General Terms for a Rental Loan?

Rental Loans can be fixed 30-year or hybrid adjustable rate mortgages (ARMs). ARM rates with 3/1, 5/1, and 7/1 configurations are commonly offered. Rates are based on the specific property and borrower at the time of the application. Some rental loans can fund as low as $60K and reach maximum amounts upwards of $3M.

What Types of Properties Qualify for a Rental Loan?

Depending upon the lender, certain properties are eligible for a rental loan. When looking for a rental loan, investors should research what types of properties their potential lenders will finance before making a final decision. The following are some properties that can qualify for a rental loan:

  • Single Family Residences (SFR)
  • 2-4 Unit Properties with Loan to Value (LTV) less than 80%
  • Planned Unit Developments (PUDs) with a 10 acre maximum. Additional restrictions may apply.
  • Fannie Mae warrantable condominiums with a Loan to Value (LTV) less than 70%
  • Townhouses
  • Non-owner occupied (investment) properties

Documents Needed for Rental Loans

When investors finally decide on the lender they wish to apply for a loan with, there will be certain documents and files that are requested. These documents are essential for the lender in order to determine a borrower’s eligibility, investing background, financial status, and business verification. When ready to fill out the application, investors may be asked to provide these important pieces of information:

  • Most recent quarterly statement or last two months bank statements
  • Currently owned properties (REO Schedule)
  • Leases for currently rented units
  • Certification of Business Purpose / Non-Owner Occupied Affidavit
  • LLC Operating Agreement or Articles of Corporation
  • Valid Driver’s License
  • Sales Contract