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A rental property loan is financing that allows investors to purchase rental real estate as an income-generating investment property. There are two main types of rental property loans to consider:
Conventional rental loans follow standard guidelines set by Fannie Mae, Freddie Mac, FHA, or banks and lending institutions. To qualify for a conventional loan for a rental property, borrowers typically need:
The benefit of conventional loans is that they often come with lower interest rates since they are less risky for lenders compared to other rental financing options. The downside is that eligibility criteria is stricter, requiring good credit, income, and cash savings to cover down payments.
Debt Service Coverage Ratio (DSCR) Loans
A DSCR rental property loan looks primarily at the property's projected net operating income to determine eligibility rather than borrower qualifications like income.
To qualify for a DSCR loan, the rental property must have:
The major advantage of DSCR loans is that are easier to qualify for and they open up rental financing to more buyers since they do not look at income and tax returns so they can be less paperwork heavy. However, they come with higher interest rates compared to conventional loan.
Which type of loan is best depends on an investor's unique financial situation and goals. Speaking to a mortgage specialist can help buyers understand all their rental financing options.
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