How to Choose a Lender When You Want to Buy an Investment Property

In preparation for choosing a lender for your investment property, you’ll need to familiarize yourself with loan qualifications and underwriting requirements and decide which factors to consider when choosing a lender. With some preparation, you can position yourself as an ideal candidate for lenders and be prepared to present the best offer when you find your investment property of choice.

What to know about financing an investment property 

If you are financing a rental property investment for the first time, it’s critical to understand that it will be more challenging to qualify for an investment property loan. Lenders consider real estate investment loans to be higher risk than loans for primary residents.

If you want to make the qualifying process more manageable, familiarize yourself with the underwriting standards used for investment property financing. In general, you’ll need to show that you can afford your existing mortgage and the monthly loan payments on an investment property. Underwriters will also consider your down payment amount, credit scores, and debt-to-income ratio and evaluate your current savings.  

Down payments for investment properties 

Real estate investors should expect to make a larger down payment than they might have with their primary residence. When purchasing a primary home, you may have qualified for a loan with as low as zero to 3% down. In contrast, you should expect lenders to ask for a larger down payment, often between 20% and 35%. A larger down payment will also help you secure better terms for your loan. 

Credit Score 

As with a residential mortgage, lenders will use your credit score as a determining factor in the loan pre-approval and underwriting process. While everyone’s circumstances are different, lenders typically like to see a minimum credit score of 680. If you have a credit score at or above 740, you can expect better interest rates for your investment property loan. 

Debt-to-income ratio (DTI)

The loan underwriter for your investment property lender will use DTI to evaluate your future ability to repay your loan. DTI is calculated by measuring the percent of your monthly income that goes toward paying off debt. If you currently have a mortgage, car payment, or student loan, those debt payments will limit the amount of money your lender will be willing to offer you for an investment property loan. 

Ideally, you want a DTI that falls between 36% and 45% to qualify for a rental property mortgage. Remember that future rental income is not factored into the debt-to-income (DTI) calculations. 

Savings 

In addition to reviewing your down payment, credit score, and DTI, underwriters will look to see if you have enough money in savings to cover 3-6 months of mortgage payments. Mortgage payments include the loan principal, interest, taxes, and insurance. The more savings you have access to, the more likely a lender will approve your investment property loan.

Additional underwriting requirements for real estate investment financing

In some cases, loan underwriters will ask for additional documentation for investment property financing. 

Additional underwriting requirements for investment properties can include:

• Banking statements
• Documentation that you are buying the property for business or investment purposes
• Operating agreement for your business entity, if applicable 
• Purchase and sale contract
• Lease agreement (if the property already has a tenant in place)

We encourage you to discuss these requirements with your real estate agent and potential lenders. Understanding what you need for underwriting can help you be more prepared and quickly act on opportunities. 

How to Compare Mortgage Lenders for an Investment Property 

Once you have a clear idea of what factors will influence the pre-approval and underwriting process, you can begin to compare potential lenders. Finding the right lender will help eliminate headaches as you progress through the process and can ensure you make financially sound and advantageous decisions. 

Types of investment property loans a lender underwrites

As you begin your research into potential lenders, you’ll need to ensure that any potential lenders will underwrite your chosen type of loan. Not every lender will underwrite every kind of loan. Carefully research each lender's loan options, terms, and rates before moving forward. 

Down payment requirements

Down payment requirements will vary depending on the loan type but can also vary from lender to lender. Even with a seemingly similar loan, the down payment requirements can differ vastly. Carefully even with a similar loan review all the details to ensure that you compare loans accurately. 

For example, one loan may offer a lower down payment, but the interest rate will be higher. Depending on the particulars of your financial situation, you can choose a set of terms that will help you best meet your financial goals. 

Interest rates and APRs

Interest rates for your investment property loan will vary from lender to lender. Remember that it’s not enough to compare interest rates outright. You also need to carefully consider the terms of each loan to ensure that you are comparing loans apples to apples. With so much information, it can be overwhelming. Take your time to evaluate each lender, loan, and terms carefully. 

Minimum and maximum funding limits

When choosing a lender for your investment property loan, you may also need to assess the lenders based on the minimum and maximum funding limits. These limits indicate the minimum or maximum amount of money the lender will offer to loan you if you qualify. Funding limits will be critical if you want to purchase a real estate investment in a higher-priced market.

Complexity of the lender’s underwriting process 

Finally, you should evaluate the underwriting process of each lender for its difficulty and complexity. If you have a shorter timeline for your real estate investment purchase, it may be advantageous to work with a lender who can expedite the process. If you plan to purchase an investment property in a competitive market, it may be helpful to have a lender with a smooth, efficient underwriting process. Sometimes, the more quickly you can close, the more competitive your offer will be. 

Discuss the underwriting process with your lender and your real estate agent for an ideal outcome. In some cases, there may be aspects of the underwriting process that you can begin before identifying a property. 

After you’ve found a lender for your investment property, consider Belong

Your real estate agent and lender are critical professionals who will aid you in purchasing an investment property. Once you’ve purchased and financed your investment property, you can consider what other professionals will best support your new investment. 

Belong offers you an opportunity to increase the return and limit hassles related to your new investment property. We help you price your rental home for maximum cash flow and can guarantee rental payments. When the time comes to find tenants, we attract, screen, and retain residents who will value your new property as much as you do. Finally, we assist with any maintenance or repairs that you might need. 

If you have a new investment property or want to do the maths before you commit, check out our back-of-the-napkin calculator to do some quick sums on how Belong can support your real estate investment strategy.