6 Reasons Real Estate Investors Get Rejected for a Mortgage
Getting a mortgage to buy an investment property is different from getting a mortgage for a primary residence. So, if you’re not familiar with the lending guidelines for an investment property, there’s a chance of your application being denied.
Investing in real estate can be a profitable venture, allowing you to earn passive income and build your net worth. But it’s important that you know what underwriters look for in an applicant to improve your approval odds.
Here’s a look at six reasons why real estate investors may get rejected for a mortgage.
Too Many Existing Loans
A conventional mortgage loan is commonly used to purchase an investment property because government loans — such as FHA, VA and USDA — are only intended for primary residences. Therefore, if you buy a property with the intent of using it as an investment, you may not be able to get one of those loans. The only exception is if you purchase a multi-unit building and reside in one of the units.
Even though a conventional home loan is the “go-to” product for many real estate investors, some investors run into problems as they accumulate more and more properties. Fannie Mae only allows real estate investors to carry a maximum of five to 10 mortgage loans at one time. If you already own 10 properties and you’re looking to get a conventional loan to finance an 11th property, your mortgage application is likely to get denied.
Poor Credit Rating
Mortgage loans for investment properties are riskier than mortgage loans for a primary residence because you’re not living in the property. Instead, you’re relying on rental income to cover the mortgage payment. Typically, getting approved for a mortgage to buy an investment property will require a minimum credit score of 640 to 680 with a conventional loan.
If you’re seeking a loan with a low credit rating or a short credit history, you might not qualify until you strengthen your credit score. To improve your personal score, pay your bills on time, pay down debt, and don’t apply for too many credit accounts. Credit inquiries can lower your credit score.
Insufficient Paper Trail
Similar to getting a mortgage for a primary residence, getting a mortgage for an investment property will require a strong paper trail. It’s important that you’re able to document your income and assets. You need to provide W-2s, personal and business tax returns, bank statements, and a year-to-date profit and loss statement if you are self-employed.
If you don’t keep organized or accurate financial records, or if you’re unable to provide documentation to verify your income, you’re less likely to be approved than an applicant who can provide the necessary paperwork.
Not Enough Assets
Keep in mind that mortgage insurance does not cover a rental or an investment property. Therefore, you may be rejected for a mortgage if you don’t have at least a 20% down payment.
Unfortunately, you can’t use gift funds for your down payment and/or closing costs when buying an investment property. You must provide 100% of funds. The only exception is if the person providing the gift will be a co-borrower on the application.
You may also be rejected if you don’t have enough assets to cover the mortgage payment for at least three to six months. If a tenant moves out of a rental property and you can’t find another tenant right away, you’re still responsible for the mortgage payment despite the property being empty. Having a cash reserve can keep the mortgage in good standing and you’ll avoid late payments.
High Debt-to-Income Ratio
Some novice real estate investors believe they can include future rental income when qualifying for a mortgage to buy an investment property. This, however, isn’t the case in every situation.
Future rental income is not a guarantee because you may not always have a tenant for a property. It’s our responsibility to ensure your current income is enough to afford the mortgage payment in the event that you experience a lapse in rental income.
There is one caveat, however. You may be able to use future rental income when qualifying for the loan if you have property management experience or a successful track record as a real estate investor.
Be aware that some real estate investors have difficulty getting a mortgage for an investment property when they also carry a mortgage on a personal residence or have other debts. Getting an additional mortgage could result in a dangerously high debt-to-income ratio — the percentage of your monthly gross income that goes toward debt payments.
If unable to get a mortgage for an investment property on your own, one option is adding a co-borrower to the mortgage application, perhaps a spouse or a business partner. In such a scenario, both of your incomes are used for qualifying purposes. Keep in mind that your co-borrower‘s credit is also taken into consideration. If your co-borrower has a low credit rating, you may be unable to get a mortgage, or you may pay a higher interest rate.
Property is Ineligible for Financing
Your application to purchase an investment property may also be denied if the property you’re buying is ineligible for financing. Getting a mortgage to buy an investment property is easier when purchasing a single-family home or a townhouse. Other types of properties aren’t an option depending on the circumstances.
For example, in order to purchase a condo or a co-op as an investment property, in most cases at least 30% of the building must be owner-occupied. If there’s a lower percentage of owner occupancy, you can’t use conventional financing for the property.
Also, you may be unable to get a mortgage for an investment property if you’re buying a manufactured home, a timeshare, or a bed and breakfast. Speak with one of our experienced loan experts for more details on lending guidelines.
Ethos Lending is a new type of mortgage lender. We use technology to keep our operational costs as low as possible. From closing costs to interest rates, we made it our mission to make the process of buying a home more affordable. Get in touch with one of our mortgage specialists to learn more.