Rates are still low, property values have not only stabilized but are on the move up and rental income is on the rise. But most real estate investors still need to finance their purchase.Bank Investment Loans  Finding a loan for a rental property is similar to applying for any other mortgage with regard to income, credit and assets. With an asset requirement that other mortgage types don’t require: reserves.

Reserves, from a bank’s perspective, are an amount distinguished by the number of months’ worth of mortgage payments in a liquid account, or PITI. PITI is the acronym for principal, interest, taxes and insurance. If a lender requires six months of PITI in the bank and the mortgage payment is $2,300, the bank wants you to have 6 X $2,300 = $13,800 in an account after closing. These reserve funds are in addition to the money needed for a down payment and required closing costs.

Approval guidelines for investment properties can require anywhere from six to 12 months’ of PITI in a liquid account and potential investors need to make sure they have those funds available and if they don’t the lender won’t approve the loan, regardless of the credit or income profile of the borrower.

Why the requirement for reserves? First, it addresses the additional risk involved buying investment property. Mortgage lenders know that borrowers who run into financial trouble will let an investment property go into foreclosure before they let go of their primary residence. Lenders don’t like to see a buyer use up all their cash for a down payment and closing costs then have zero money in the bank immediately afterward.

What happens if the tenants can’t pay the rent? Will the mortgage go delinquent? What if property taxes or insurance go up, can the borrower afford the increase? What if the HVAC goes out and needs to be replaced? What if the property becomes vacant for an extended period of time?

Banks ask a lot of “what if” questions when reviewing a mortgage application and an investment property loan will have a few more of those but the primary issue to be resolved is making sure there is enough working capital available to maintain the property as well as service the debt comfortably. Making sure the borrower has enough cash in the bank helps the loan application sail through the approval process.