Turning your single-family home into a rental property can be a good way to bring in additional cash flow and capitalize on other benefits and incentives that come with owning real estate. A question many property owners have, however, is how they will finance their new home if they choose to rent out their existing property. Does their current mortgage affect their ability to secure a new mortgage? The answer is always, “it depends on the bank,” but here are some things to keep in mind.
First, Understand the Details of Your Existing Mortgage Agreement
Rules vary from lender to lender, so be sure to read the fine print on your mortgage agreement before turning over your property’s keys to renters. Some loans require the property to remain owner-occupied or at least be owner-occupied for a certain period of time.
Next, Know What the Bank is Looking For
When it comes to banks and securing a loan for a residential property, pretty much the only thing they care about is your credit score and income.
While the application will require you to input every last detail of your financial picture, the choice to approve or not to approve a mortgage generally comes down to your debt-to-income ratio. Banks want to know what your W2 income is and how that fits with what the monthly payment is going to be. They really could care less about how much you have sitting in savings or what you have squirreled away in other accounts.
Shop Around for Lenders
You should always shop around for mortgage lenders, but it’s especially important if you’re planning to rent your property. Certain banks are more willing to work with rental property owners than others, and they just get it. They understand that your rental property income will pay for the first mortgage and your W2 income is financing the second mortgage.
Other banks do not get this at all and will not give you credit for the rental income you generate. Obviously, if you’re going to be renting your property, you want to partner with a lender who understands and is receptive to this process. Shop around, talk to other real estate investors, and find a bank that has experience working with rental property owners.
Securing financing for a second property will require you to do some homework, but it’s worth the extra time and effort it may take to secure the best loans for your situation. There’s plenty more to consider when deciding whether to rent or sell your home. We discuss it further on our webinar “Should You Rent or Sell Your House?” You can watch the replay here. If you have questions about property management in Central Ohio, contact our team at RL Property Management.