How to Qualify for a Rental Property


Thinking of becoming a landlord? Thought of the prospect of buying a rental unit and letting the tenant in essence make your mortgage payment for you? Owning real estate is one of the easiest ways to increase wealth over time but there are some things you need to know in advance when considering buying a financing a rental unit. Here is what you need to know.

Conventional Only

Unless you’re financing a duplex or a 2-4 unit property and live in one of the units, government-backed financing options of VA, FHA and USDA can’t apply. Those mortgages are only for an owner-occupied property. That leaves conventional mortgages underwritten to standards issued by Fannie Mae and Freddie Mac to be used.

Down payment requirements for a rental unit are typically 20% of the sales price of the home but you can get a slightly better rate with 25% down. Interest rates on these loan programs will also be slightly higher compared to a loan for a primary residence but overall these are the only differences.

Your First

When you finance your first rental property you’ll soon discover any rental income from the property can’t be used to help you qualify. You’ll need to qualify with your income and the new mortgage along with associated property taxes and insurance. Yet with your second rental property lenders do in fact allow rental income to be used.

This is why it’s not uncommon to find an individual real estate investor who owns 10 or even 20 or more rental properties because not only can the income be used to offset the mortgage payment but also provide a nice monthly income. The only requirement at this point is to have a two year history of being a landlord and that ownership is evidenced by reviewing copies of your federal income tax returns, specifically shown on Schedule E.

That’s why real estate investors carefully review the potential acquisition to make sure the property cash flows and will not be an added expense. If the investor determines the property will indeed provide a positive cash flow, even considering an occasional vacancy, the property will soon be under contract.

For more information or questions about mortgage loans,
Please visit Majestic Home Loan

Or Call  (855) 757-8748

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