If you’ve finally convinced yourself that it’s time to invest in rental property, there’s still plenty of time. The inventory, while depleted somewhat, is still robust and interest rates are still near historic lows. But even if you’ve financed your primary residence, lenders will evaluate your investment propertygetting ready to apply loan in a slightly different manner. Here’s what you can expect.

 

Investor properties provide more risk to a lender compared to a loan for a primary residence. That additional risk is offset by a higher interest rate and more down payment, a minimum 20 percent or 25 percent depending upon the lender. You can also expect more scrutiny as it relates to credit. Banks that finance rentals can require a credit score some 20 to 30 more basis points compared to a loan for an owner occupied property.

Your first property will require that you qualify based upon two house payments—your current one and the new one on the investment property. Even if there is substantially more rent produced by the renter, unless you can demonstrate a history of being a landlord, don’t expect the lender to use that additional income. Landlord experience is documented by reviewing your federal income tax returns and the associated Schedule E.

Lenders may also require additional cash reserves. Reserves are calculated as a multiple of the mortgage payment. Six month reserve requirements mean the lender wants evidence of six months’ worth of mortgage payments available to you in a liquid account.

Finally, the lender will need an application from you. You can apply at the lender’s office or you can apply directly online. You don’t need to have a property picked out to apply for an investment property loan, you can add the address later, but before you get too much further, applying for a mortgage is your final step in the process.