Everything You Should Know About Rental Property Financing
A rental property financing is a line of credit (flexible, open-ended loans that a borrower may access on time) that allows you either to buy the rental property or renovate a property of your current property.
While dealing with traditional lenders, you’ll be needed to provide a big down payment to secure your rental property mortgage. If you purchase a rental home that you don’t even intend to live in, mainstream lenders in Canada can even expect a 20 percent down payment on it and if you’re purchasing a big apartment or buying in a city like Vancouver that is in high demand, many lenders will expect an additional charge from you.
This rental property financing illustrates why it’s imperative to pick the right lender.
How is Rental Property Financing Different From Others?
Rental property mortgages are used to finance revenue-generating real estate sectors such as single-family rentals (SFR), small multifamily buildings with 4 or less than 4 units, along with townhouses and condos.
Since loans for a rental property are used for further investments, the loan terms and conditions here become stricter than with a mortgage used by a primary residence. That’s because a lender views more risk associated with rental property loan when a borrower is not living in the home.
Various Ways of Rental Property Financing
PORTFOLIO LENDER
Portfolio lenders and small local community banks keep the mortgage loans. They outsource their own books instead of selling them to other agencies. Loan terms and conditions may be more adjustable and designed to meet the needs of both the borrower and the lender. A portfolio loan for a rental property can be considered a good option for a borrower with a bad credit score or a high debt-to-income ratio.
Out of all the options available, you can consider a Mortgage Broker.
CONVENTIONAL
Conventional lenders are like banks and credit unions. They provide finances based on the borrower’s credit score, and down payment. They follow the guidelines set by Freddie Mac and Fannie Mae.
They provide the number of finances based on the borrower’s debt-to-income ratio.
GROUP INVESTING
A group of investors bypassing banks altogether forms a limited liability company and raises funds to invest in the real estate sector. So in this way, Instead of just one individual borrower owning a rental property, the LLC owns the real estate and investors own shares as per their contribution.
An LLC operating agreement can be structured in a way to make monthly principal and interest payments to their members who contribute capital, that’s much similar to the way a mortgage loan works in other ways like in the case of conventional or private lenders.
HOME EQUITY LINE OF CREDIT (HELOC)
A borrower having primary residential property or other rental properties may be able to resolve accrued equity into cash with a home equity line of credit (HELOC). A HELOC is a second-position loan on a property and works similarly to a credit card.
A lender will generally allow a borrower to have access to up to 80% of the equity in a property to use for the purchasing of a rental property, including any repairs if required. A credit line from a HELOC does not need to be used right away, giving investors access to funds according to situations when and if they are needed.
MULTI-FAMILY FINANCING
or with a negative credit score. Advantages: easy to
qualify, affordable mortgage insurance involved, low-interest rates, higher debt-to-income ratio.
PRIVATE LENDERS
Lenders who provide funds to you according to their terms and conditions. Unlike traditional mortgage methods, they offer mortgages at lesser interest rates with lesser formalities.
Why Should You Consult a Mortgage Broker?
- They offer wide choices with a wide range of lenders.
- They make it easy to compare loan conditions by getting all the information from lenders at once.
- In some cases, lenders give borrowers special rates that will decrease their mortgage costs.
- They can also negotiate on your behalf with the lender.
- They will save you time and money by presenting you with the best deal available in the mark.
Streamlining Your Due Diligence Process
Mortgage brokers ensure that you get the loan you need and offer you the best deal available in the market. They treat your finances like their own throughout the loan application process.
Applies Fair Service Charge
Charges of the whole process reflect the risk associated with the loan agreement. So the whole process becomes more reliable and transparent.
Having Access To A Wide Lender Network
Brokers have a huge network of lenders and also negotiate on your behalf with different lenders so that lenders can lend you at fair rates.
Backup Lender
Mortgage brokers can also help you apply for secondary lenders.
Go Into Details
Once a lender has been finalized, a loan offer will be drafted. All the technicalities involved will be explained to you and your funds will be transferred to a lawyer.
How Does It Work?
Creates a Passive Source of Income
The biggest benefit of rental property financing is that it’s a passive income source for lenders which means that it is a recurring income that requires relatively less effort to maintain. It can be an alluring option for people looking to make some money without hustling much, or even as additional financial security after retirement.
Emotional Security
The biggest benefit of rental property financing is that it’s a passive income source for lenders which means that it is a recurring income that requires relatively less effort to maintain. It can be an alluring option for people looking to make some money without hustling much, or even as additional financial security after retirement.
Easy and Secure Financing Options
Having your dream home has become quite easier now with the availability of wide and easy financing options. Gone are the days when you were able to accumulate money for your dream house in your 40s and 50s. You can purchase it in your 20s and be a proud owner of a fully paid-off home before you turn 50. You need to carefully choose a home loan lender who can give you flexibility in managing your home loan repayment to suit your present and future income needs.
Tax Benefits
The principal and interest repayment on your home loan provide you with attractive tax breaks, and remember, you can earn tax credits and file a tax return.
Obeying Social Norms
Purchasing your own home is a status symbol of accomplishment and success in society. Your status and wealth are measured by the home that you own. Thus, by purchasing a house, you can increase your social status significantly.
Your Property is Your Investment
As the prices of property always appreciate over a longer period of time. Purchasing a home means purchasing wealth and its value will increase over time. Delay in purchasing property means later on you have to pay high for purchasing the same property that you were thinking of buying.
Alpha Mortgage House Corporation is a Mortgage Broker in Surrey, BC. We provide mortgages for Home Purchases, Project financing, Second mortgages, Commercial mortgages, Mortgages for first-time home buyers and more. Alpha Mortgage is a one-stop solution for all your mortgage needs. Our team works with top lenders to provide you with the best financial options.