Discover the Stability of Long-Term Rentals for Home Security
If you want to own an investment property that you plan to rent to tenants for many years to come, consider a Long Term Rental (LTR) loan.
LTR loans provide financing with competitively low interest rates based on rental cash flow. This makes financing more accessible than standard loans, which base financing on factors such as investor’s personal income.
What is an LTR Loan?
There are a handful of options to finance investment property. Loan types often differ based on their qualification requirements and the terms they offer. The best loan for you will depend on your individual needs.
With an LTR loan you can qualify for a mortgage that will finance a non-owner occupied rental property you plan to manage with tenants for the long term.
As a non-QM (non-qualifying mortgage) an LTR loan provides competitively low interest rates. This is possible because it relies on the property being worth a certain value in rent-ready condition. It’s ideal for investors who primarily make their income from rent, rather than fixing and flipping property, and for those who plan to manage the property for many years to come.
Financing takes into consideration the cash flow you’ll get from the property as well as the condition and value of the property itself. Tax returns aren’t required to qualify and debt-to-income ratios aren’t needed. You also have the option to apply as a corporate identity, rather than being individually tied to the property and the loan.
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How to Get an LTR Loan
If you’d like to see whether you qualify for an LTR loan, connect with us. To get you started, we’ve outlined the steps and qualifications needed to help you understand the process.
The Financing Process
By sharing basic information about your potential purchase or refinance, we’ll work with you to see if an LTR loan meets your needs and whether the property qualifies.
As we move through the process we’ll discuss the terms you qualify for and your financing options, as well as request the necessary documentation.
We’re with you through each step, leading to a simple and efficient closing so that you can move forward with your investment.
LTR Loan Requirements to Meet
These are some of the common requirements often needed to qualify for an LTR loan. If you have questions about these requirements, we’re here to help.
- We’ll need to know what the expected leverage is for the property, whether the loan is for a purchase or refinance. In many cases, the Loan-to-Value ratio needs to be above 70-75%.
- If applying as a corporate entity, we need LLC documentation including Articles of Incorporation, Employer Identification Number, and an Operating Agreement.
- We don’t need income information but do need the last three months of bank statements.
- A valid Driver’s License is required for the borrower.
- Rent roll/proof of rents is needed to show rents that are due and rents that have been collected.
- You’ll also need to provide contact information for insurance, title/escrow, and a point of contact for an inspection/Broker Price Opinion for the property.
- The property needs to be in a condition that is rent-ready, rather than needing renovations.
LTR Loan FAQs
Financing property is an important step in reaching your investment goals. It’s ok to have questions. We’ve compiled answers to the frequently asked ones, but don’t hesitate to ask more.
LTR loans provide financing for a specific investment purpose. They offer low interest rates for property investors looking specifically to purchase or refinance a property that they will rent long term. With financing based on rental cash flow, LTR loans are often more accessible to investors than the standard income requirements needed for traditional loans.
LTR loans can be given to an LLC, rather than an individual, which isn’t possible with standard mortgages. They may also serve as a good option to refinance loans with higher interest rates.
Although your personal income isn’t considered for financing, you will need to share your credit score to get approved for an LTR loan. The minimum requirements vary depending on the situation but a credit score of 680 or higher is often required.
For an LTR loan, the Debt Service Coverage Ratio (DSCR) is used rather than the DTI ratio. The broad definition of “debt service” is the cash that is required to cover repaying interest and principal for a debt during a set period of time. Borrowers and lenders use DSCR to measure the ability to repay the annual debt service compared to the net operating income generated by the property.
Calculating the debt service coverage ratio helps to estimate how much an investment property can rent for to help predict the property’s value.
To calculate it, divide the net operating income of the property you want to finance by the total debt service. Net operating income is the revenue minus certain operating expenses. Debt servicing is the cash that is required to cover repaying interest and principal for a debt during a set period of time.
A larger DSCR means there is more income to service the debt, making it more likely you’ll qualify for the financing you want.
There are closing costs associated with processing any loan, and the costs of an LTR loan are comparable to standard rental property mortgages. They include costs for the lender to service the loan, as well as an appraisal and other fees.
You’ll also need to make a down payment that will be paid at closing. This is typically 25% of the loan amount for an LTR loan.
For many real estate investors, the purpose of an LTR loan is to finance a property they plan to manage and rent out for many years to come. Various qualification factors and loan terms are set to provide this loan while allowing for competitively low interest rates, making it one of the best options for financing a long term rental property.
For these reasons, there is likely a prepayment penalty if you decide to pay off the loan, typically within the first five years of having it. It’s one factor that can help you determine if this loan fits your overall investment goals and timeline.
