How to Apply for a Rental Loan
Steps for Applying for a Rental Loan
Applying for a rental loan is one of the most stressful parts of being a real estate investor. As borrowers, we need to help the lender build a fair picture of our finances. That means we must provide a lot of documentation (read: proof of our financial status).
As we satisfy the lender’s information needs, it’s vital not to lose sight of our own business goals. In addition to the list of documents below, ask key questions about interest rate, discount points, closing costs, and other rental loan concerns.
Take a Financial Snapshot
When applying for a rental loan, we’ll need to know where we stand before we show that information to a lender.
Take a hard look at income, debts, assets, and cash flow. Make sure to account for concerns like cash reserves and emergencies.
Compare your snapshot to the price of the rental property, estimated payments, property taxes, fees, and down payment amount.
Gather Your Documents
Once you deeply understand how much rental loan you can afford, gather written proof to back up your position. Lenders will be interested in the following documents.
- W-2s. Wage earners will need to furnish two years of W-2 forms when applying for any rental loan.
- Pay stubs. Provide copies of the two most recent.
- Federal Tax Returns. Show two years of tax returns to back up any income from other sources. This includes social security, child support, alimony, and commissions. If an income source doesn’t show up in your tax returns, lenders may not accept it.
- Spouse income. Lenders may take a spouse’s income into account for rental loan purposes. Spouse income documents are the same as those listed above.
- Cosigner. This isn’t a form of income but a way to strengthen your application. Since cosigners are liable for the loan debt, this isn’t a step to take lightly.
- Bank statements. When applying for a rental loan, you’ll need the most recent two months of statements from checking and savings accounts.
- Profit and loss statements. The shows the net worth of your business.There’s a good example here, or you can use IRS Schedule C.
- Retirement account statements. Include recent statements from IRAs, 401ks and other retirement accounts.
- Stock/bond statements. You’ll need documentation of any investment assets to include these assets when applying for a rental loan.
- Child support and alimony. By law, we’ll need to list monthly alimony and/or child support payments as debts for loan and mortgage purposes.
- Monthly payments. You only need to provide the amount of any minimum monthly debt payments, no matter how much you actually pay.
Not all the documents below apply for every borrower or for every real estate rental loan. Generally, the actual documents list will come from the lender. We’ll need documented proof of any financial claim we make in the rental loan application.
- Driver’s license or state photo ID.
- Business license.
- Mortgage statement.
- Proof of property insurance.
- Lease agreement on current property.
- IRS 1099 forms.
Questions for the Lender
In applying for a rental loan, we may focus on proving our finances and neglect our own needs. Ask the questions below to satisfy your own due diligence.
- What are the terms? The terms of a real estate rental loan include interest rate, Loan to Value (LTV) and points. A $75,000 loan on a $100,000 rental has a 75% LTV. It may have a 3.6% interest rate. The lender may also charge 2 discount points, which means an extra $1,500 ($75,000 x 2%).
- What’s the funding timeline? This is the time it takes for a lender to process rental loan’ documentation and deliver financing.
- What’s the minimum down payment? A smaller down payment on a rental loan typically means a higher interest rate.
- What are the closing costs? How much are the closing fees connected to the loan?
- Is there a penalty for early repayment? Find out whether the lender charges extra for prepayment. If so, ask about renegotiating the penalty to a lower number.