Lending to first time investors... Are banks looking for certain qualifications besides the money?

19 Replies

We're saving up to invest in the next year or two.  If I approach a lender with 20% down but no landlord experience, will there be a problem? How can I prepare now?


Nope.  Not as long as you have the credit score, down payment and income to qualify for the loan without the rental income you'll be fine. 

I assume you mean SFR or small multi. A big apartment building might be more complex.

Agree with Jon - shouldn't be an issue, presuming SFR, 20% down, and good credit score. As far as 'preparing' - obviously the 20% down and know your front and back-end ratios.

25% down will still get you a better conventional interest rate.  Great credit will help the level of approval you receive.  Additional assets in reserve are another thing a bank looks at on an investment property.  Typically you'll want three to six month's monthly payment in your bank in reserve (per property) to show the bank.  Good luck!

Talk to your potential banks to see what their lending criteria is. They will have a max LTV ratio they want. The closer you are to it, the more they scrutinize the deal. I just got a duplex under contract for $90,000 that the bank appraised for $129,000. I still have to put 20% of the purchase price down, but that gives me a LTV under 60% so they are happy about that.

Also, look at DSCR. You will likely need a minimum of 1.2 but should shoot for at least 1.4.

This is of course you are talking commercial side of a bank. 

If you are talking consumer type loans, regardless of whether or not you will occupy it, then it is easier to qualify but you have tons of more paperwork. It is more of the typical matter of making sure appraisal is ok, DTI, credit score, down payment, cash reserves etc, strong track record of earning a consistent salary etc. If you make $10/hour and have been living paycheck to paycheck for a while but magically have a $12,000 deposit showing up 3 days before you apply for your mortgage, be prepared to explain that.

If you start small, should not be an issue.  Start with nothing more than a quadplex to get your feet wet.  Also, plan for 25% down.  If you can get 20%, good for you.

Great info! Do you always have to qualify for the mortgage based on your income vs rental income? If there are existing tenants? 

Almost all banks will only consider rental income once you have two years landlording experience.   That is, two tax returns showing rental income.

Once you have that they will look at your tax returns for existing properties. For the new ones, the appraisal will need to include a rent estimate. They then take 75% of that and subtract the new PITI payment. If that's positive, it adds to your income and helps your DTI. If its negative it adds to the debt side and hurts your DTI. The mortgage itself doesn't directly figure into the DTI calculation, in this case.

Before you have the two years experience they will consider only income from other sources and put the full payment on the new property onto the debt side.

Wow. Ok so I know it's controversial, but I'm considering cashing out my 401k to use for a down payment. I own my primary residence and doubt I'd qualify for another significant mortgage.

So I'd have a down payment but that's it. In my mind, my only option would be to pay for a less expensive property with cash (out of state, I'm in California). After penalties & taxes I'll probably end up around $80K.  Then I could get some experience. 

Does that sound like a reasonable next step? Thanks in advance!

@Colleen Pelliccia lavin

 It depends on what your short term and long term goals are.   There's plenty of cash flowing property in California so you don't necessarily have to go too far!


Call up your bank and tell them you're hypothetically looking at buying in the future. Ask them what steps you need to take and what their qualifications are. Make sure you stress that you don't want to be pre-approved and don't want your credit run (yet), you're just curious. They should be able to answer your questions without being too pushy, pulling your credit, and should be no cost to you. Just ask what their requirements are and what types of documents they will want. 

Also, community banks can vary in their qualifications from the big banks. Make sure to specify if it's your first property, second, non-owner occupied, etc. They typically get commission so they should be willing to answer your questions in the hope of winning your business in the future. Never hurts to ask.

If you will be penalized for cashing out your 401k consider rolling it into a self directed IRA or 401k. You will be able to use the money for real estate without penalty.

Hold on there, sparky. Can't roll a 401(k) if you are currently working there. Plus, the asset hit on your balance sheet for withdrawing, not to mention the penalties, taxes and loss of retirement growth make it a bad deal from the get-go. I don't even advocate borrowing from your 401(k) but it's better than liquidating. That said, all lenders look for the 5 c's right? In your case, if you want the property income to be included in your what-if, after purchase income statement, gotta go for a multi-fam building 5 units +. The property can support the purchase, hypthothetically. No landlord history required. If your going the conventional route and want to by an investment SFR, then budget and work. Save and earn more. No car payments, no lattes. Brown bag lunch. Only go to a restaurant if you're working there as your 2nd job. Be different @Colleen Pelliccia lavin . Drive your beater to your rental house and be proud!

As long as you don't plan to use the property for personal use, Kathie is right about option to invest a self-directed IRA in real estate.

Talk to several small, local banks. They're far easier to deal with than large chains. And if you plan to grow this business, the small banks will do loans beyond the 5 properties (I think it is) that you can have with FHA loans.

It also helps to get a mentor, whether you know an experienced investor or join a club where you can meet someone. When I got started years ago, my mentor called the VP he works with at a small 3-location local banks and said, "Dan, Michael wants to start investing and I think he'll do OK. I'd appreciate it if you'd give him a meeting." Meetings with a lender that start that way are a lot more productive than ones that just start as a cold call to ask the bank, "Who deals with rental property loans?"

Don't go to the bank as if you are needing their help. Shop around and find a local bank that keeps loans in-house and treats you like a customer. Be the prize and find a bank worthy of your business. Tell the lender that you are looking for a bank to work with long term on a repeat basis. Don't settle until you find a good match. One other thing to do is have everything you need to give the lender in an organized package. Fill out your application fully and ask the banker every question you can. Know what products they have and exactly what you want. Know your credit score before hand. My banker loves when i hand her a leather document case with all tax, employment, and income information sorted and tabbed. Also included is all I can giver her about the property, loan ammount, and even my numbers. My applications are electronicly filled out and easy to read. The time I spend at the bank is usually less than 10 minutes while copies are made and I ask after my bankers family and drink coffee. I find the process enjoyable and easy now. 

That makes sense too but before that I need some help strategizing my first purchase based on the money available to me.  I have a few family friends who have invested in real estate, I think I need to reach out to them. Thanks so much.

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