Buying a Rental Property
Many people are interested in buying a rental property. The process for obtaining this kind of mortgage is similar to buying a property to live in, but with some key distinctions.
Qualifying for a Rental Mortgage
Lenders treat mortgages for rentals a little differently since there is some added risk.
Down Payment: Rules vary by lender, but a typical minimum down payment is 20% for insured mortgages and 25% for conventional. You can borrow the down payment against real estate only.
Income Qualification: Clients need to demonstrate sufficient income and capacity to pay the mortgage. The rental revenue can be included as income but it is usually reduced (for example, the lender may allow 50% of the rent to count as income).
Tenancy: If there is no tenant living in the property, lenders will allow a professional appraiser to estimate the market rent. This amount can be used in the application. The mortgage broker will arrange for the appraisal.
Number of Units in A Portfolio: Most residential lenders will not approve a mortgage if the client exceeds a certain number of rental properties since this may result in an over-reliance on the rental market.
Area: Many lenders will not allow rental mortgages in smaller or more remote communities.
Short Term Rentals: Many lenders will not allow the client to include short term rentals as part of the income since this type of revenue can be seasonal. For example, rent for a Whistler condo that is rented out weekly or in a rental pool will not be included.
If a rental mortgage cannot be approved due to the above restrictions, a client can use his or her equity in a different property to obtain the funds, as long as there is sufficient income and equity. For example, a client can re-finance the mortgage on his or her own house and add the needed funds to the mortgage. The rent can not be counted as income, however. Alternatively, the client can obtain a Home Equity Line of Credit to access the funds.