Getting a mortgage is rarely an easy process free of headaches, but getting a loan for an investment property can be even trickier. Unlike the mortgage you took out on your principal residence, financing an investment property is more complicated and may require a longer period of preparation. However, don’t let this process scare you! Investing in real estate is one of the best ways to build real wealth and the long-term gain more than outweighs the arduous process it takes to finance your nest egg. If you’re ready to purchase a residential investment property, the following tips can help bring financing within reach.
Flex your Credit Score
Are you a strong borrower? The better your credit, the more options you will have for financing. In order to be a good bet with your lender you need to demonstrate a great track record of payments. Wondering how your credit measures up? Check your own credit either through Equifax.com for free or search for a paid way to do so and see how it looks. You should be aiming for a credit score of at least 680. However, the more loans you have the stricter the requirements. Loans 1-4 typically require a credit score of 680 while loans 5-10 require a score of 710.
Look for Friendly Investors
If your down payment isn’t as large as you were hoping or you have been turned down by other banks, considering going to a local bank for financing rather than a large national financial institution. Local institutions offer more flexibility and may be more willing to invest in their neighbourhood. Mortgage brokers are also a good option because they have access to a range of loan products.
Get Your Pay Cheque Ready
One thing your lender requires is proof of how you will finance your rental property. If you are on a salary, you will need to show a recent letter of employment and pay stubs. If you are self-employed or if commissions make up a large chunk of your income, you will need to provide proof of income for the last 2-3 years in the form of financial statements from your business, T1s, NOAs, and other documents. Even if you are not ready to purchase your rental property, get clear on what documents are required by reaching out to your bank or mortgage broker well beforehand.
Proof of Down Payment
Whether you will live in the investment property will affect how large of a down payment you need to put down. For investment property mortgages in Canada, non-owner occupied investment properties require at least a 20% down payment. However, if you plan on taking up residency in one of the units, you may be able to put down as little as 5-10%. As your lender will also look for proof that your down payment hasn’t been borrowed from a family member or friend, ensure your down payment has been sitting in your bank account for a minimum of three months.
Show Them the Money
In addition to the down payment, lenders will require that you have at least six months of cash reserves at the ready for both your primary residence and each rental unit. This means that if you already own a principal residence and are planning to invest in a rental, your lender will require you to have 6 months of mortgage payments in your bank account for both your main residence and your future investment property.
While investing in a rental property can be extremely profitable and is one of the best ways to secure your finances for the future, knowing when and what property to invest in is often confusing and requires the help of an experienced real estate professional. If you’re looking to build your wealth by investing in GTA real estate please don’t hesitate to contact me today 416. 903. 7653.
I’m always happy to answer your questions about investing!