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FINANCING FOR A RENTAL HOME
I am Looking for 2nd Home financing for Rental Income. Have good credit score (760+). Have a good income of 65K for me and 75K wife (combined $140K/yr gross), we own a home (owe 245K and pay $1,850 per month + $370 HOA and have 30K in bank for down, I own 2 cars that are financed (owe 19K on 1 and 17K on the other – for $800/mo payments). I need help with financing.
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3 Replies
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With your finances, financing a second rental home can be a great investment opportunity. Another Real Estate Ask recommends the following steps to help you with the process:
Think About How Much You Want To Spend
DTI: If your DTI is 41% to 43%, the general rule is to find a new loan. However, for certain borrowers, this number can reach 50%.
Annual Income: $140,000, which is approximately $11,667 monthly.
Current Debt Obligations Include:
Home mortgage: $1,850
Home Owners Association dues: $370
Secured Vehicle Loans: $800 (both cars)
Total monthly obligations: $1,850 + $370 + $800 = $3,020
DTI Calculations:
DTI = (Total Debt Paid)/ (Gross Monthly Income) = (3,020)/(11,667) = Approximately 25.9%
This results in a healthy DTI, low enough to weather another borrowing.
Look Out For Other Financing Opportunities
Conventional Loans: These are sought out when second properties are being purchased. In light of your income and credit profile, this should be fine.
Rental Property Loans: Since the intention is to lease the property, it is reasonable to consider financing options targeted at rental investment. Its provisions may differ from those applicable when considering house loans.
FHA (Home) Loans: There is no question that this type of loan has a depreciation value, provided the borrower pursues a limited variety of financing options.
Portfolio Loans: Some lenders offer portfolio loans that may have special features, particularly for investment properties.
Some Relevant Points for Down Payment
Down Payment: This amount could be considered a down payment. Lenders usually require at least 20% down, which is $30,000 and above for investment properties.
If the property you are targeting is valued at $150,000, the $30,000 would suffice for a 20% down payment. Alter your market expectancy to keep the full 20% deposit approach.
Collect Your Documents
Credit Report: First, check that your credit report is current. Since you have a good credit score over 760, check its accuracy.
Consider having tax returns readily available, as well as recent pay stubs and wage income documentation.
Start gathering bank statements for your savings, which would be $30,000.
Start By Obtaining A Pre-Approval
Start by contacting different lenders to receive pre-approval for loans. This way, you will already know the maximum amount you can utilize and what interest rates you can benefit from.
Potential Rent Revenue Should Be Factored In Future Rent Revenue: This is helpful as it assists lenders in assessing the estimated amount or range of rental revenues and treating it as potential revenue in appraising value. So make sure you know about realistic rental prices in the area and don’t venture too far away from them.
Rental Property Management: Evaluate whether you wish to manage the property yourself or hire a property management firm, as this might alter your cash flow.
Consider Extra Expenditure
Closing Costs: Be mindful of the closing costs, which are in addition to the normal charges and may vary between 2 and 5 % of the loan amount.
Insurance and Taxes: If relevant, rental Properties must have property tax, homeowners insurance, and even HOA costs.
Your excellent financial history puts you in an enviable position to secure a second loan if you intend to obtain it for renting purposes. First, determine how much you want to spend and how to finance it, and go for pre-approval. This preparation will help you make clear decisions in the subsequent search for an investment property. If you have any more detailed queries or want me to assist you more closely, ask!
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How much can I realistically borrow based on my financial situation?
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We also look at several factors, including your income, existing obligations or debts, credit score, and general considerations surrounding the lending policies. Here is a more elaborate breakdown below:
Evaluating Your Earnings
Combined Gross Income: $140,000 per year.
Total gross monthly rate: $140,000/12= $11,667.
Obtaining Your Parameter of DTI (Debt-to-Income) Ratio
DTI ratio is one of the important metrics that lenders consider when determining whether you should take on more debt.
Current Debt Servicing – Monthly Payments:
Mortgage: $1850.
HOA: $370.
Car Payments: $800 (total for two cars).
Total Current Debt Monthly Payment: $1850 + $370 + $800 = $3,020.
DTI Determination:
DTI= Total Monthly Debt/Vel Gross Income
DTI = $3,020/$11,667 = 25.9%.
The highest allowable DTI ratio
While most lenders favor DTIs between 50% and 43% for conventional loans, some qualified borrowers can have between 43% and 50%.
Determining Your Potential Borrowing Power
With the help of the conventional DTI ratio, it can be ascertained how much more loan can be availed:
Maximum Allowable Debt Payments:
43% DTI means;
Maximum monthly debt = 0.43 x $11,667, or approximately $5,018.
This debt eliminates the possibility of new loans;
Later on, the earnings of the new loan are quite optimistic.
Additional Monthly Debt Allowance = $5,018 – $3,020 = $1,998
Making an Estimate on the Monthly Mortgage Payment, you will have to Make
Let us presume instead that this Additional monthly allowance is to be used as a monthly Mortgage allowance; in that case, the Mortgage amount would be based on the Loan interest and loan term.
To illustrate, here is a calculation of how much you can get with fixed terms of a 5%-30-year mortgage.
Lenders tend to rule out the amount of debt resulting from a mortgage depreciation, an indication that would allow them to estimate the borrowing limits;
Monthly Payment: $1,998
The mortgage payment becomes ridiculous for 30 years at a 5 % interest rate on a $420,000 loan.
Think If You Will Make a Down Payment
If it’s a second home or for rental purposes, an investment mortgage would typically see lenders need a 20% deposit to start.
Secured Debt Amount Sum Up:
The investment property fee instead would be high if the loan’s value is $420,000, which is quite a lot, admittedly, but due to reasons of economic unpredictability, the purchase price will have to exceed the fee along with the deposit.
Example:
Selling Price = Amount of Loan / (1- Percent of Down Payment)
Selling Price = 420,000/ (1- 0.2) = 525,000.
Depending on your conditions, you can consider applying for a new mortgage of around $420,000. By doing so, you should be able to purchase a home costing around $525,000 as long as you pay a 20% down payment.
Note
These estimates can change depending on the exact lender’s requirements and particular interest rates. It would be best to discuss this with a mortgage lender so that advice that suits your individual needs is provided. Let me know if you have more questions or need more details!
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