Buy To Let Mortgages

Although initially popular in the United Kingdom, buy-to-let (rent) mortgages are becoming increasingly prevalent in the United States as an option for those wanting to buy a property in order to rent it.

Buy-to-let mortgages are set up in a specific way to provide advantages for those looking to buy houses as investments, then renting them out for a profit.

They typically feature fixed or variable rates, but also tend to require higher down payments and higher interest rates than traditional, primary residence mortgages.

Since the purpose of buying the property is to rent it out and receive an additional revenue stream, this new income can allow you to qualify for a loan you might not have been able to under different circumstances.

FINANCING METHODS FOR A BUY TO LET MORTGAGE 

There are several ways by which customers can go about securing financing for a buy-to-let mortgage. 

Even if you’re already paying a previously secured mortgage for your primary home, conventional mortgages could still be an option for buy-to-let.

However, since the new rental property is not an owner-occupied home, lenders expect you to meet stricter terms, thereby minimizing their risks in issuing a second mortgage.

Keep in mind that a higher down payment brings your rates down and creates equity faster. If an investor has the means to pay more upfront, it can lead to favorable mortgage terms.

A Home Equity Line of Credit (HELOC) is another alternative for financing a buy-to-let property. HELOCs use the equity accrued on a primary home mortgage as collateral for a line of credit from which you can withdraw any amount up to your limits.

These amounts can be used to purchase the rental property, usually with more amenable rates than a conventional mortgage.

A multi-unit property in which the buyer is residing can take advantage of FHA or VA mortgages. These types of loans have very favorable terms, like small down payments, and do not require exceptional credit scores to be approved, making them an attractive option for those that qualify. 

Although other financing methods for buy-to-let are available, options like hard money loans should only be considered for the reselling, or “flipping,” of homes.

These types of loans are not beneficial for buyers interested in renting as they are short-term loans that require repayment in 1 to 5 years. 

BENEFITS OF BUY TO LET MORTGAGES

Even considering the possibility of higher rates and down payments, a buy-to-let mortgage can become an incredibly profitable arrangement for the borrower given the right location and economic climate. Some might even prefer buy-to-let over other investment strategies.

Fully occupied properties with faithfully paying tenants can create streams of income that generate profit many times your monthly mortgage payment. What's more, this extra revenue can be put back into the property, improving it so that even higher rents can be commanded.

Home improvements can either be simple ones like repainting and changing fixtures, or substantial ones like remodeling kitchens and closets. Not only do they allow for higher rents, but they also add value for any future selling considerations.

Since real estate tends to appreciate over time, any increase in the value of your property can allow for the acquisition of additional rental properties. Although traditional lenders will only approve up to 4 mortgages per investor, under certain circumstances (and stricter requirements) up to 10 are allowed.

WHAT TO LOOK OUT FOR WITH A BUY TO LET MORTGAGE

On the flip side, some factors can be a hindrance when looking into buy-to-let properties.

For starters, securing a mortgage can be a burdensome process. Conventional mortgage lenders (traditionally large banks) require larger down payments (20% to 25%), establish higher interest rates, and call for higher credit scores.

You need at least six months' worth of cash reserves as a guarantee that payments can be made, and some banks require 12 months.

Lenders also request ample documentation; everything from W-2s to tax returns. Self-employed buyers might even need assistance from a CPA to produce evidence of income and liquidity. Second, a buy-to-let mortgage is like any other kind of investment; there is always an element of risk involved when you’re at the mercy of the market.

Your mortgage payment will stay level regardless of what property values do, and if values tank you could end up not being able to charge enough rent to break even and pay your mortgage.

That can be particularly troublesome if you’ve used your home’s equity, as defaults on HELOCs can adversely affect not only your investment property but your primary home as well.

There is also the possibility of non-paying tenants or tenants that damage the property, situations that eat away at the expected revenue from the rental.

Tenant's rights laws vary across the nation and people like this can become a persistent and difficult-to-get-rid-of problem, thus making the initial tenant screening process another aspect you’d need to focus on.

If multiple rental properties is an appealing option, know that the more mortgages you carry, the higher the initial down payments will be. Also, higher credit scores are required to qualify.

Nonetheless, with just a modicum of research into the real estate opportunities in your area, and comparing mortgage terms and rates across different lenders, you can determine if buy-to-let is a beneficial investment strategy for you.

Weighing the above-mentioned pros and cons, looking at product offerings and rates, as well as the application process, we’ve determined that the following companies are the best providers if you’re looking into buy-to-let mortgages.