Loans for Rental Properties

Chris Gallant Rental Property, Uncategorized

Rental properties differ a lot from your private residence, and they have more risk. Renters will not maintain your property as they should. That is because it doesn’t belong to them and they can vacate anytime they want.

But this is not so with your private residence. As a result, the requirements for obtaining a mortgage for rental properties differ from that of your primary home.

Lenders perceive rental properties as a high-risk investment, and some may not even provide funding for them. The ones that offer a loan for rental properties often require you to pay the premium.

In this article, we will explain all the requirements to obtain a loan for a rental property. Certain factors affect these requirements, and we will explore them as well.

  1. What is the number of units in the rental property?

The number of units in the property will determine its zoning. Properties that have between one to four units fall under the residential category. But those that have five units and above are among the commercial category.

For residential properties, the criteria and the financing options are almost like that of your primary residence. Although the loan requirements are rigorous and the loan value to rate is about 80%. Commercial properties have more stringent conditions and higher interest rates.

Lenders will require you to obtain a commercial mortgage for properties with five or more units. Qualifying for a commercial mortgage is tough and you will need a broker or bank that offers it.

  1. Will you reside in the rental property?

If you plan to reside in one of the units, the property will be among the owner-occupied category. In this case, lenders will request a lower down payment. That is because owner-occupied properties have lesser risks. Lenders believe that tenants will not cause more damage to the property if the owner is residing with them.

However, if you are not planning to reside in the property, the house will be among the non-owner-occupied group. Here, you will make a higher down payment because the property carries more risk.

  1. How much do you have for a down payment?

The down payment is another essential factor you should consider when getting a loan for a rental property. Since 2010, lenders in Canada now require a larger down payment for rental properties. The down payment varies depending on the number of units and if the owner will occupy the property.

  • Owner-occupied properties with 1 to 2 units require a down payment of 5%, and the maximum loan to value is 95%.
  • You will need a 10% down payment for owner-occupied properties with 3 to 4 units, and the maximum loan to value is 90%.
  • Non-owner-occupied properties with 1-4 units will need a down payment of at least 20%, and the maximum loan to value is 80%.

From February 2016, the minimum down payment for the owner-occupied rental property is 5% for the first $500,000. There is an additional 10% for any amount above the initial $500,000 up to $1M. Anything above $1M will attract a 20% down payment.

It is essential to note that while some lenders may allow you to borrow the down payment or receive them as gifts, others may be against it.

  1. What is your net worth?

Lenders will also consider your net worth before they offer you a loan for rental property. Some lenders will assess you to check if you have a net worth of at least $100,000 before you qualify for the loan.

  1. How much can you afford?

Several factors affect affordability. When considering a loan, you should note the number of units, the necessary down payment, closing cost, and other one-time costs. Lenders will assess you to check if you can afford the property by using their affordability index.

  1. Will the rental property be profitable?

In a bid to protect themselves, lenders will want to know how profitable the rental property will be. The criteria for knowing this varies among lenders. Most lenders will use the Total Debt Service Ratio (TDSR) to assess if you are eligible for the loan.

Here, lenders will assume the amount you will collect as rent, even when it may be lesser than what you intend to collect. Lenders can also use other criteria such as debt coverage ratio, rental offset rule, or rental add back. It would be best to discuss with your broker to know which models they are using to assess the rental property.

  1. How many rental properties do you have?

If you have more rental properties, you may not qualify to obtain a loan from lenders. That is because your TDSR may give a negative ratio. And lenders will believe that you will not be able to service your debts. Here, having lesser rental properties is more beneficial.

 

Before you get a loan for a rental property, We recommend a mortgage pre-approval. Doing so will let you know your estimated mortgage payments and interest rate over time. Contact The Mortgage Fellow for more guidance.


About This Location/Listing

Rental properties differ a lot from your private residence, and they have more risk. Renters will not maintain your property as they should. That is because it doesn’t belong to them and they can vacate anytime they want. But this is not so with your private residence. As a result, the requirements for obtaining a mortgage for rental properties differ from that of your primary home. Lenders perceive rental properties as a high-risk investment, and some may not even provide funding for them. The ones that offer a loan for rental properties often require you to pay the premium. In this article, we will explain all the requirements to obtain a loan for a rental property. Certain factors affect these requirements, and we will explore them as well.
  1. What is the number of units in the rental property?

The number of units in the property will determine its zoning. Properties that have between one to four units fall under the residential category. But those that have five units and above are among the commercial category. For residential properties, the criteria and the financing options are almost like that of your primary residence. Although the loan requirements are rigorous and the loan value to rate is about 80%. Commercial properties have more stringent conditions and higher interest rates. Lenders will require you to obtain a commercial mortgage for properties with five or more units. Qualifying for a commercial mortgage is tough and you will need a broker or bank that offers it.
  1. Will you reside in the rental property?

If you plan to reside in one of the units, the property will be among the owner-occupied category. In this case, lenders will request a lower down payment. That is because owner-occupied properties have lesser risks. Lenders believe that tenants will not cause more damage to the property if the owner is residing with them. However, if you are not planning to reside in the property, the house will be among the non-owner-occupied group. Here, you will make a higher down payment because the property carries more risk.
  1. How much do you have for a down payment?

The down payment is another essential factor you should consider when getting a loan for a rental property. Since 2010, lenders in Canada now require a larger down payment for rental properties. The down payment varies depending on the number of units and if the owner will occupy the property.
  • Owner-occupied properties with 1 to 2 units require a down payment of 5%, and the maximum loan to value is 95%.
  • You will need a 10% down payment for owner-occupied properties with 3 to 4 units, and the maximum loan to value is 90%.
  • Non-owner-occupied properties with 1-4 units will need a down payment of at least 20%, and the maximum loan to value is 80%.
From February 2016, the minimum down payment for the owner-occupied rental property is 5% for the first $500,000. There is an additional 10% for any amount above the initial $500,000 up to $1M. Anything above $1M will attract a 20% down payment. It is essential to note that while some lenders may allow you to borrow the down payment or receive them as gifts, others may be against it.
  1. What is your net worth?

Lenders will also consider your net worth before they offer you a loan for rental property. Some lenders will assess you to check if you have a net worth of at least $100,000 before you qualify for the loan.
  1. How much can you afford?

Several factors affect affordability. When considering a loan, you should note the number of units, the necessary down payment, closing cost, and other one-time costs. Lenders will assess you to check if you can afford the property by using their affordability index.
  1. Will the rental property be profitable?

In a bid to protect themselves, lenders will want to know how profitable the rental property will be. The criteria for knowing this varies among lenders. Most lenders will use the Total Debt Service Ratio (TDSR) to assess if you are eligible for the loan. Here, lenders will assume the amount you will collect as rent, even when it may be lesser than what you intend to collect. Lenders can also use other criteria such as debt coverage ratio, rental offset rule, or rental add back. It would be best to discuss with your broker to know which models they are using to assess the rental property.
  1. How many rental properties do you have?

If you have more rental properties, you may not qualify to obtain a loan from lenders. That is because your TDSR may give a negative ratio. And lenders will believe that you will not be able to service your debts. Here, having lesser rental properties is more beneficial.   Before you get a loan for a rental property, We recommend a mortgage pre-approval. Doing so will let you know your estimated mortgage payments and interest rate over time. Contact The Mortgage Fellow for more guidance.

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