An investment property is a piece of real estate that you do not live on but intend to use to generate a profit. Like any real estate, you may look for outside financing to purchase the property. However, lenders generally approach investment properties with greater caution than primary residences.
The reason it may be harder to secure a loan for an investment property is because if you fall on tough financial times, you might decide to only make payments on your primary home than a property that you rent out to someone else. The Motley Fool explains a few ways that you might make a good case to a lender if you want to finance an investment property.
Have a high credit score
A person with a low credit score has probably gone through bankruptcy and incurred a lot of debts. Lenders look at these people as high risks since they were not able to handle debt in the past. By contrast, a high score may assure a lender that they can trust you with a loan.
Consider checking your credit scores in advance. There are three different credit bureaus that generate a credit score, so be sure to check each one. A score of 740 or above may help you secure almost any loan, and going above 760 could help you attain lower interest rates.
Have cash reserves
Showing that you have a strong income may help your case, but a lender might also want you to have cash reserves in case you run into sudden financial trouble. Lenders may measure your reserves by how much you can pay in taxes, insurance and mortgage payments over a period of a few months. The exact guidelines will differ according to the lender you approach.
Have a low debt-to-income ratio
Owing debt should not be an automatic disqualifier, but a lender might not approve your loan if you pay too much in debt obligations each month. A high amount of monthly debt payments could give you a high debt to income ratio. Lenders may determine a DTI ratio by a front-end ratio that only looks at your mortgage payments, or by a back-end ratio that factors in your monthly obligations along with your mortgage.
Given the challenges involved in finding capital for real estate, any step you take to present yourself well to a lender may make the difference in your case.