Criteria You'll Need to Qualify for an Investor Loan

Are you looking to dip your toe into the world of real estate investing? I don’t think I go a day without hearing about how profitable and beneficial it is to diversify your portfolio with real estate; it has become increasingly popular and obtainable for so many people in the last few years. Not only do investment properties give you the chance to earn your investment back tenfold, but you invest in a more stable and less volatile market.?

If you are seeking an investment property, finding a loan you qualify for is the first step. The approval process of an investor loan and a mortgage are very similar and require similar qualifications in order to get them. If you are on your way to add an investment property to your portfolio, here are the criteria you’ll need to meet for an investor loan.?

Your Credit

Like any significant purchase, your credit score will be assessed. When you apply for an investor loan, the lenders will do a background check on your credit, ensuring that you have a good record of paying your bills on time and if there are any negative or derogatory items on the credit. Depending on the amount of the loan and down payment, the minimum credit score lenders would be willing to accept can change. The score minimum starts at 620; anything above 720 can help ensure a better loan and interest rate.?

Cash Reserves

Many lenders will want to see an appropriate amount of cash reserves or easily liquified assets before qualifying you for an investor loan. It is common for lenders to want at least 15% of the loan amount in reserves in addition to the amount of the down payment. Cash reserves ensure you would be able to pay it back if something were to happen and ensure you can support yourself without an income in the case of a flipping project.?

Down Payment

The down payment you can provide is an essential piece when it comes to a lender accepting you for a loan. A down payment is regularly 15% to 25% of the purchase price for the investment property. On top of that, you should still have a significant amount of cash reserves to protect against repairs and rent loss. The more you have saved up, the more likely a lender will accept you for a loan.?

Debt-to-Income Ratio

Your debt-to-income ratio is a significant deciding factor in whether or not a lender will choose to lend to you. This is their way of ensuring that you can handle your current financial situation and confidently take on a property on top of that. You can figure out your ratio with this formula– Total monthly debts / gross monthly income. Your debts should include anything from credit card payments, student loans, car loans, your current mortgage, and any personal loans. In order to qualify, your DTI should not exceed 50%. However, many lenders wish to see your DTI around 36%, but it will vary depending on the lender.?

Documentation and Employment History

Lastly, your potential lender will want to read through your documentation and employment history to be more well-versed in your past and know what to expect from you. This might be the last two years of tax returns, two years of W-2s, and bank statements dating back a few months in order to ensure outside income. Showing a steady income stream from stable employment can show lenders that you can afford the property and loan while also taking care of yourself.

The criteria to meet for an investor loan will vary from lender to lender, but these are five of the most common things to look out for. If you have questions or wish to start your real estate investment journey, message me or contact the KC Investor Funding team.?

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