November 25, 2017

How Financing Has Changed When Purchasing A Rental Property

Rental PropertyJust 4 years ago you could purchase an investment property with nothing down and get the best interest rates.  Today, rental financing is like night and day.  To get a mortgage on a small 1 – 4 unit non-owner occupied rental property, you need a 20% down payment and you don’t always get the lowest rate.

Regulators and lenders have put higher-risk borrowers under a microscope and that includes real estate investors.  As a result, it is now trickier to qualify for a rental property mortgage.  So, if you are considering a small rental property and you need a mortgage, here are some things to remember:

  1. Down Payment:  you will require an ample down payment of at least 20% of the purchase price
  2. Picking The Right Lender Matters More Than Ever:  if you want to be approved, your ‘total debt ratio (TDS)’ must fall within lender limits.  Your TDS includes your total monthly expenses divided by total monthly income from all sources, including rental income (depending on the lender, they will use from 50-75% of the income).  Most lenders use a 40-42% debt ratio
  3.  Multiple Rental Properties:  Most lenders prohibit you from owning and/or financing an unlimited number of rental properties.  Even if they don’t explicitly forbid it, the inability to count all your rental income in debt ratio calculations can make approvals challenging.  It often forces people with big rental portfolios to renew mortgages with their existing lender at unfavourable rates and terms.  The key to remember is that lenders with the best rates often have the tightest rules.
  4. More Paperwork:  A few years ago, it was easier to use an appraiser’s estimate of a property’s rental income in lieu of a signed lease.  Today, more and more lenders want to see a signed written lease or other proof of rental income.  It also helps to have 2 years’ tax returns available.  The returns reflect your net gain or loss on a property and can make it easier to qualify.
  5. The Rate Is Secondary:  You can still find lenders that extend their best rates but do they offer the other features you need.  Will they allow you to put the property in a company name?  Do they allow you to carry a greater debt ratio?  Will they let you finance more than 4 properties?  Do they allow you a 30-35 year amortization to maximize your cash flow?  Do they allow you to add a 2nd mortgage?

There are many factors to consider, if you need any assistance call me for a free consultation.

Colleen Saunders is a 20 year veteran in the mortgage industry, serving Mississauga, Burlington, Oakville and Toronto and offering all mortgage related services such as 2nd mortgages, private mortgages and more.

To contact Colleen, please fill out the form on  www.mortgagesbycolleen.ca  or call 416-459-2406

Article provided by The Globe And Mail December 16th, 2012

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