The mortgage market for rental properties has changed drastically over the past few years with multiple new mortgage rules coming into effect. If you’re trying to find mortgage financing for a rental property, here’s a quick summary of some of the most common questions we get when financing rentals. Further to this, I recommend aligning yourself with a property power team to explore all avenues before committing to the purchase of an investment property.
How does the mortgage process differ when buying a revenue property versus an owner occupied purchase?
As the main borrower will not be residing in the property, getting a mortgage on an investment property is deemed higher risk by the lenders. The reason is if an individual is experiencing any financial difficulty, the expectation is for them to default on their rental property payments before their principle residence. As a result, the lenders will be scrutinizing the mortgage application more closely in order to ensure the main borrower can support the investment property in the event the renter defaults on payments. The aspects of the application that the lenders will be looking for additional strength in are:
- Net worth– your assets minus your liabilities give you a positive or negative net worth
The lenders like to see a positive net worth with access to some liquid assets for property or tenant related emergencies.
- Credit Score
The lenders like to see low credit utilization and good credit habits as there are higher credit score requirements for investment property financing.
- Additional supporting documentation may be requested
The lender may request additional documentation to confirm income and access to liquid assets. Don’t be surprised if you’re asked for personal tax returns and corresponding Notice of Assessments. If you’re self-employed, you may also be asked for company financials.
- Purchasing in a company name
If you are purchasing an investment property in a company name, the lender may request documents regarding the company such as incorporation documentation to confirm company structure and ownership.
What are the possible sources for downpayment for an investment property purchase?
There are a few downpayment sources allowed when it comes to a rental property purchase. Most lenders require you have at least a portion of your downpayment from your own resources though some will also allow additional downpayment funds to come from the below sources. As a tip, when it comes to getting approved for a mortgage on a rental property, having the entire downpayment from your own resources looks the most favorable to a lender.
- Own resources– Saved up in a bank account, RRSP’s, investments or sale of an existing property. Be prepared to provide 60-90 days history of any savings being used for downpayment to confirm the funds were not derived from illegal activities.
- Borrowed from an unsecured source– From an unsecured line of credit or personal demand loan. Expect to be asked to provide paperwork confirming the balance available and minimum payment amount.
- Borrowed from a secured source– Home Equity Line of Credit or proceeds of a refinance of an existing property you already own. Again, you will likely be asked to provide paperwork confirming the minimum payment and that funds are available from that source.
- Vendor-Take-Back– The seller agrees to carry a 2nd mortgage for you until you can pay it off or refinance your first mortgage to eliminate the 2nd mortgage carried by the vendor/seller
- Gifted from an immediate family member– A gift letter and proof of deposit of the funds will be required to confirm the downpayment funds.
As of April 19th, 2011, a 20% minimum down-payment is required to purchase an investment property though a good majority of lenders seem to be more comfortable lending up to a maximum of 75% of the property value without mortgage insurance.
How does the lender verify rental income?
Some lenders will allow market rents determined by an appraiser if a lease agreement is not available and other lenders make a lease agreement mandatory if rental income is being used for qualifying. Many lenders request your tax returns to confirm you have been declaring and paying taxes on your rental income over the past year. This is usually the case for borrowers who already own a number of rental properties. The requirements differ among lenders, so double check with your mortgage professional for what will be required in your specific case.
Are the income documentation requirements different for an investment property purchase?
If you are self-employed, the lender may request additional documentation pertaining to your business such as business financials or business bank statements. Otherwise, salaried or hourly employment document requirements are the same as owner-occupied financing. If you are looking to buy a rental property under one of the stated income programs still available do confirm with your mortgage professional that the pricing and lending maximums still fit into a budget that allows you to cash-flow the property.
Are interest rates higher for rental properties?
A good number of lenders add a rate premium if the property is a rental. I will say it is more often the norm, than the exception. If you’re budget is very dependent on getting the best mortgage rate available, be prepared to have great credit, verifiable income, and a strong property in a desirable area.
These are not hard and fast rules, though I want to ensure the mortgage process does not surprise you when it comes to purchasing an investment property. If you’re thinking of getting into the rental market for the first time, do your research first. Check out some networking groups, talk with other investors, read forums, and get referrals for real estate professionals that have experience with rental properties.
As always, if you have any questions or would like mortgage information, please do not hesitate to contact us at 866-932-8412 or info@MortgageGirl.ca. Stay in the loop by following us on Twitter @mortgagegirlca.