How do I do a buy-to-let mortgage?

In real estate, the term "let" means to lease, so a "buy to let (lease) home" is one being bought for the purpose of leasing it out to renters. This is investment property rather than an owner-occupied home. After the "mortgage meltdown," lenders stopped financing investment properties. However, with so many foreclosures, investors have been buying up what they consider bargains. Investment mortgages are still available, but harder to get.

Investment Purchase

Find a property that meets your requirements for investment purposes. The home should be one that can bring in revenues sufficient to cover the entire payment of principal, interest, taxes and insurance (PITI). Investment loans are considered high risk and will require a 20 percent to 25 percent down payment. ($100,000 purchase, 25%=$25,000 down payment= $75,000 loan). This amount over 30 years at 5.5%=$425.84 monthly payment. If your taxes are $1,200 per year ($1200/12=$100 per month), and insurance costs $800 per year ($800/12=$66.66 per month), your grand total of $425.84+$100+$66.66 would equal a $592.50 monthly payment.

Costs Calculated

Make an appointment with your favorite mortgage broker and provide two years of income documents (tax returns), 30 days of pay stubs, a list of all consumer monthly debt payments, two months of banking and asset statements with proof of down payment ($25,000), three to six months of payment reserves (3X$592.50=$1,777.50), the cost of a year of insurance ($800) and closing costs. Your broker will go over all of these costs and whether the seller can contribute anything toward closing costs.

Income and Qualifying

Have your broker calculate your debt ratios to be sure you can qualify for the loan. If you make $100,000 per year ($100,000/12=$8,333.33 per month). Your own mortgage payment is $950 per month, auto payment $350 per month, and your payment for credit card minimums is $120 per month. These total $1,420 per month. Add to this the $592.50=$2,012.50 per month. $2012.50/$8333.33=24.15% as a total debt ratio. FNMA (Conventional lending) shows that the max debt ratio can be 36%, so this works. While the rental income will offset the new home payment, you can only count 75% of the income (25% vacancy factor), so if the new rent will be $850 per month X 75%=$637.50. There is no negative cash flow. The new payment of $592.50 is close to "breaking even."

Credit

Investment purchases will require good credit scores. A 680 mid-score (combination of all three scores) will work, but there would be a lender price adjustment for the score, making your closing cost higher. Typically, a 740 score or higher works best for investor loans.

Source:

How To Buy Good Investment Property

Investment Property Calculator

How To Buy Rental Property