What exactly is a rental property loan? Basically, a rental property loan is an unsecured first lien mortgage loan taken by a tenant as security against the rented property instead of an owner occupier. Typically, to qualify, that property must be earn-able rent-ready. In most cases, however, rental property loans are also used for short term rentals, like vacation rentals.
There are several different types of home loans, and each one has its own benefits and limitations. Broadly, there are two types of home loans: home equity loans and home equity lines of credit (or HELOC). Home equity loans are available to borrowers with good to excellent credit. The credit score of the borrower does not factor into the approval process of this type of loan. Instead, what matters is the value of the borrower’s existing home – which represents his “equity”.
However, while an excellent credit history is an important criterion for getting a loan for a rental property, it is not by itself an indicator of future financial success or failure. This is because a good credit history can only provide a base level of information and can never be relied upon to predict what will happen in the future. What the lender takes into account then are the past payments of the borrower. As a result, the lender may look at factors like payment frequency, number of late payments, total number of borrowings and loan-to-value ratios. The higher these factors are, the more risky it may be for the borrower, and thus the higher interest rates he would have to pay.
The other main characteristic of a borrower’s credit score should have is sufficient cash reserves. Most lenders require borrowers to have at least a five percent margin over their property’s market value as cash reserves. A good credit score is an indication that the borrower has sufficient cash reserves, but the fact remains that most lenders also look at the amount of cash still held by the borrower as part of the overall risk (which may not be negative in all cases) associated with the property and so look at the cash-to-asset ratio, which is another indicator of the borrower’s ability to service the monthly rental property loans.
There are however some unique differences between rental property loans from hard-money loans. While hard money loans typically have a shorter term, they are offered at a higher rate of interest. Also, hard money loans are usually made to investors who already own a significant portion of the property and are using the money to make improvements on the property. This makes hard money loans very attractive to real estate investors. On the other hand, most banks and other lending institutions do not provide rental property loans to property investors unless they also own a majority share or majority interest in the underlying property.
Many real estate investors rely on a few key factors when choosing which lender to secure their rental property loans. They will first look at the interest rates, but also examine the terms and conditions of the loan as well as the various ways in which collateral can be collected. Once these factors are looked at, and the investor has found the right lending institution, they can then go on to choose the particular type of loan that will best meet their financial goals and needs.
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