When financing the purchase of a rental property, lenders will not fund more than 80% of the purchase price. So the minimum down payment you’ll need is 20% percent. The down payment needs to be liquid funds in your bank account. No lender will consider seller financing, gap funding or other creative financing strategies for term rental loans.
What if the purchase is below market value?
Lenders consider your purchase price to be the value, so you can’t get 100% financing, or anything higher than 80% loan-to-purchase price.
Your Credit Score May Affect the Down Payment
While 20% is the minimum down payment, many investors will have to contribute more than that to the purchase. Some lenders adjust the maximum loan-to-purchase price according to the borrower’s credit score. For example, a credit score of 720 could mean the lender won’t fund more than 75% percent of the purchase price, and the investor’s minimum down payment would be 25%. A credit score of 650 could put the maximum at 70% which means a 30% down payment would be required.
An investor with a credit score less than 620 will have a very difficult time finding a lender to fund their long-term rental loan. With short-term bridge or rehab loans, the FICO score is not a deciding factor for many lenders. But in long-term rental financing, the credit score is extremely important, and lenders cannot make exceptions.
DSCR is What Really Determines the Down Payment
While the location and credit score are significant elements in determining the maximum leverage for a long-term rental loan, the most important factor is the DSCR, which stands for debt service coverage ratio. It’s a calculation of the subject property’s monthly rental income against the total of the monthly expenses, which includes the mortgage payment, taxes, insurance AND homeowner association dues if applicable.
We’ll write a separate guide to explain the calculation in detail, but focusing on the down payment requirement, just realize that if the calculation result is less than 1.0, 1.25, or whatever the lender’s minimum ratio is, the lender will lower the loan amount which means you’d have to increase the down payment.
How to Reduce the Down Payment for Rental Investments
If you’re looking to acquire a residential rental property with a lower down payment of only 10% or 15%, the only way that’s possible is if the property needs to be renovated, and the value increases significantly after the work is completed.
It would have to be two separate loans. One for the purchase and renovation for a term up to 12 months, then the DSCR rental loan can refinance the short-term loan when the property is ready to be occupied by a tenant. Many of the private lending companies listed on our website offer both short-term and long-term financing to real estate investors.
Common Traits for DSCR Long-Term Rental Loans
- Loan terms range from 5 to 30 years
- All lenders charge a prepayment penalty, at least 18 months
- No rural areas
- Rental can be leased annually, or a nightly vacation rental
- Seasoning not typically required
- Meaning the property does not need to have been rented for a certain number of months
- Property can be vacant, but it must be move-in ready when you apply for the loan
- Lenders can estimate the rental income
How to Find Direct Lenders for Long-Term Rental Loans
Option 1: Browse Lenders
Search on our site for direct lenders. All lenders have a very detailed profile with information about their lending guidelines, rates, fees and much more. Make contact with each out directly. Send an email, call, or visit their websites.
- Start at the Long-Term Rental Lenders page
- Type in a state or major metro area, and click SEARCH
- Click REFINE RESULTS in the Filters section if needed
- View each lender’s profile to learn about their guidelines, pricing and more
- Click the green CONTACT button and reach out to the lender directly
The companies listed pay us a monthly advertising fee, so there is no cost to make contact with them directly. Please remind each company that you found them on PrivateLenderLink.com.
Option 2: Create a Loan Request
Fill out a questionnaire with information about your financing needs. You can then browse lenders and invite a few of them to view your deal. Or ask us for recommendations; we’ll review it and invite a few select lenders that we feel may be a good fit.