How To Get A Mortgage For A Rental Property
If you are looking to buy a property to rent it out, then here is how you get a mortgage for your buy-to-let endeavor. However, let me first say that this is not financial advice by any stretch of the imagination. As a disclaimer, let me say that if you take my advice, you do so while knowing it is just opinion and not financial advice by any definition. I say that because many buy-to-let endeavors fail miserably, and I don’t want to encourage you to do something that may go wrong for you. Still, here is something you should know.
It Was Bad News, But Not If You Are Determined
The year 2016 has seen a nasty shift against buying to rent. It started in cash-strapped Greece a few years ago, and it has slowly spread across Europe and has now hit US shores. Banks are less and less willing to give mortgages to citizens in order for them to purchase buy-to-let properties.
Such endeavors are now considered businesses, which require a business account, a tax paying sole trader, insurance, and experience selling rental space and/or letting rooms to people.
Frankly, in the conclusion (at the end of the article), I say that all you need is a good credit rating and a sizable down payment in order to get your buy-to-let property. And…it is true, but having business knowledge, a business plan and business experience will help tip the scales in your favor if your mortgage lender is umming and arring (on the fence) about your application.
Just A Passive Suggestion, But…
You cannot fall in off the streets and get a loan for a rental place as easily as you used to. With that in mind, have you considered simply applying for a mortgage as if you are planning on living in the property, and when you have the mortgage, start renting the property out?
Does your bank really need to know you intend to rent out the property? If they are not willing to give buy-to-rent mortgages to people who are not trading, then why not apply for a regular mortgage instead and set up your letting business after you have purchased.
About Rental Properties And Wealth Building
We have published a few articles on the topic of wealth building, and even though we have touched upon using rental property to create income, I do not believe it to be a good way to build wealth. It is a good way to make money, and there is plenty of security in buying a rental property.
In addition, as house prices rise, the demand for rental property increases, so you have picked a good time to buy a place so you may rent it out. However, if you are looking to build wealth, you should maybe consider a few other methods that do not demand such a large starter deposit.
Rental properties will make you money, but they are not efficient ways to build wealth. If anything, they are simply ways of ensuring you never go hungry, but that is assuming you make clever life and investing decisions and you don’t do something silly such as get into further debt.
Arrive With A Great Credit Score And Plenty Of Deposit Money
Most people reading this article do not have a great credit rating. Maybe your credit rating is okay and average, but not good. You probably do not have much of a deposit either.
Your lender is going to expect at least a 10% deposit from you, and if you have more to invest, such as 20 to 25%, then your lender is more likely to say yes.
If you do not have a good credit rating and/or you do not have a robust deposit, then you need to shelve your idea and do a little work before you start visiting lenders for a quote.
If you do not have the credit rating, then work on it and do not consider a mortgage for a rental property until you have the desired rating. If you are working with a partner or spouse, then maybe a joint account would help. You could both use a joint account to pay your bills over a period of months and years. Then, you may build your joint credit rating with overdrafts and such. Showing that you both handle credit well when you both work together is always a good thing.
You should pay off as much debt as you can before you apply for your mortgage. The more debt you have, then the worse your credit rating it. Take a few months and years to build up your credit rating by avoiding bouncing checks, avoiding unplanned overdrafts, and by paying all your bills on time. Use credit cards and pay off the balances before each payment cycle, which is usually at the end of the month. This will show that you can use credit correctly, which will increase your credit rating.
Pay off your debt and save up more and more deposit money. Do not get a loan for your deposit. If your lenders find out, then they will go out of their way “not” to lend to you. If you keep it secret from them, then you still have to repay the loan while paying your mortgage, which is yet another expense.
What Extra Expenses Will My House Purchase Create?
If you are dumb enough to get a loan to pay your starter deposit for your mortgage, then you have to pay that fee every month. You also have to make your mortgage payment every month.
You will also have to insure your home against damage, and you will probably have to insure your boiler and plumbing so that you may have them checked every few months (as per the law).
Your tenants will require maintenance money of some sort, from when they want showerheads replacing to when they say a stranger broke the window. You will probably need contents insurance, and your state may demand that you have public liability insurance because you are renting to people as a business.
There will probably be property taxes to pay if you own your house rather than live in your landlord’s house. Don’t forget that you also have to pay for your mortgage payments during the weeks where your house is empty because you will not have tenants to pay it for you.
Furthermore, there are many landlords that cannot handle the idea of advertising the place, checking people out, taking a deposit, and taking care of their tenants. Some people hire an estate agency or a housing management company to take care of their house for them. The company does all the paperwork, advertising and searching and in return, the housing company takes a chunk of the tenant’s rent. It is another expense that eats into your rent money and any profit you hoped to make.
Getting A Mortgage For A Rental Property Means Lots Of Paperwork
If you are buying a house to let, then your bank or lender will require more paperwork than they would for a normal house purchase. Expect to spend a day or two going over it and getting it right. Also, while you are at it, see if you can extend the mortgage ever so slightly to cover some of the closing costs. Don’t queer the deal by asking, but it is not uncommon for banks to contribute a little towards the closing fee if they are dealing with loyal customers, and some people are able to lend a little extra to cover some of the closing costs.
Conclusion – Oversimplified But Accurate
Without meaning to oversimplify, you need to walk in with a great credit score and a good credit rating. Since the house will generate money, you do not need to worry too much about having a superior monthly income, but if you can prove you do not need to live off the rents you make, then you stand a better chance of getting the mortgage.
Otherwise, use your common sense and work your way up to getting the mortgage with planning, saving and credit building, rather than rushing off without thinking it through. Don’t get a loan to cover your down payment, and try to prove or show that you have enough business acumen to sell rental space and maintain a property.
Beware of just how much the endeavor will cost you both at the beginning and while you are a landlord. Other than that, if you have the down payment and the credit rating, you are all set.