You’re probably aware of the front-end and back-end ratios the bank uses to decide if you qualify for a mortgage. With a rental, it’s exactly the same thing. More down makes for better ratios and easier qualifying. If you already own a property, the payment (including insurance, taxes, etc.) will be counted as a liability when qualifying for the second mortgage just like a 5-year car loan would.
From easiest to most difficult:
1) You don’t own anything and are trying to qualify for a rental property. To my knowledge, there is no lender who would accept less than 20% down on a property that you intend to rent, at least not at a remotely acceptable interest rate. I believe FHA loans require periodic verification of owner-occupancy (don’t quote me on that), so lying to get a low-down loan may not be workable.
2) You own a rental with a tenant, and want to buy a second property for yourself. Most lenders will count about 75% of the rent as income, offsetting the liability of the mortgage. However, many lenders won’t even consider counting any of the rent as income unless the property has been rented steady for a year.
3) You own a home and want to buy a rental property. This is the most difficult because the bank doesn’t count potential rent as income. You would need enough income to qualify for both mortgages and all the associated costs.
Every lender I talked to stated that 30% down was necessary for the second property, whether you had a tenant in an existing rental or not. That’s not to say a 20% loan isn’t available, I’m sure they’re out there, especially if you’re well-qualified and have a lot of equity in the first property. I just didn’t run into one.
