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9 Factors to Keep in Mind Before Taking Out a Single-Family Rental Loan    

9 Factors to Keep in Mind Before Taking Out a Single-Family Rental Loan    

As one of the most popular types of rental loans, single-family rental (SFR) loans make up a big portion of the rental market.

With the demand for affordable housing increasing across the country, single-family homes have become the perfect pick for investors who want to maximize profit and see a fast return on investment.

If you’re considering taking out a single-family rental loan, make sure you have the right game plan. Before you begin, speak with your business consultants and experienced rental property lenders for more insight and individualized guidance based on your unique requirements.

In this blog, we’ll take a closer look at nine factors you should keep in mind before you take out an SFR loan. Let’s begin!

1. Bank vs. Private Lenders

When applying for a SFR loan, you can turn to the bank or private lenders. Traditional banks generally make the process significantly more challenging. You’ll be required to submit extensive paperwork and endure a long wait. Acceptance rates are low, so there’s no guarantee you’ll get the loan. After waiting for several months, investors often feel disappointed when they get rejected for a SFR loan.

Working with private lenders is your best call. You’ll automatically remove a lot of hurdles from your path. For instance, private lenders typically close in 30 days, offer flexible term structures, and don’t need to verify income. You’ll enjoy a smooth and stress-free lending experience. You’ll also reap the benefits of greater control over the process. Lenders extensively collaborate with clients to ensure their unique requirements are assiduously met.

Recommended Read: How Do Rental Property Loans Work?

2. Application Fees

banknotes, a calculator, a notepad, and a ten

Many private lenders ask for upfront loan application fees. This may be a set fee or a portion of the entire loan. The difference isn’t subtle; it can amount to hundreds or thousands of dollars. Needless to say, don’t take this lightly.

Before you finalize the deal with a lender, shop around. Inquire into each lender’s application fee and ask the right questions. Is the fee refundable? Is it payable upfront or at closing? The more questions you ask, the better. Shopping around will help you compare different deals and make the right call.

3. Down Payment

In most cases, a down payment of 25% is required. This ultimately depends on the lender and the borrower’s qualifications. Keep this in mind and candidly ask for the details before you proceed with the loan. Ask your lender if there are different loan term options or loan type options, such as a 5/1 ARM loan.

4. Interest Rate

No matter which lender you approach, this will be one of the first things that will be discussed. As an investor, you must understand that a lower interest rate isn’t always a positive thing. Some lenders slash the interest rate only to include higher origination fees. If you’re not careful about this, you can end up with a bad deal.

Go over the entire term sheet; the more assiduous you are, the better. This will help you avoid getting fooled by a low interest rate that overshadows higher fees elsewhere.

Recommended Read: Flipping vs. Renting: Which Investment is Better?

5. Loan to Value (LTV) Ratio

an investor speaking with a rental property lender

The loan-to-value (LTV) ratio measures how much money can be borrowed, considered the appraised property value. If you cannot borrow enough money, you may not be able to proceed with the deal. Ask this question during the initial consultation.

6. Prepayment Penalties

Lending agencies often impose prepayment penalties—this means you need to keep the loan for a certain term. If you pay back the loan before the prepayment term is completed, you may incur a penalty. In most cases, these penalties decrease each year.

7. Borrower Qualifications

As a borrower, you must qualify for a single-family rental loan. Generally speaking, you should have a credit score of 720 or more to get the best interest rate and terms. You can still qualify for an SFR loan with a lower credit score. However, your LTV and interest rate may be less favorable.

Recommended Read: How to Improve Your Credit Score

8. Reserve Account

A reserve account with enough funds to pay for three months of mortgage is often required. Lenders don’t want investors to depend solely on rental income each month. A reserve account gives them peace of mind that the payments will be made in a timely manner.

If a tenant delays payment, repair costs get out of hand, or it becomes difficult to find a tenant, lenders want the satisfaction of knowing that funds from the reserve account will cover the mortgage payments.

Think of this as a safety net for the lender. Keep this in mind when you apply for a single-family rental loan.

9. Underwriting

an underwriter speaking with an investor during a meeting

Underwriting is an integral part of the SFR loan application process. It helps lenders determine whether a borrower is creditworthy and trustworthy or not. Think of it as a fact-checking process. An underwriter typically reviews your file to get a better idea of your credit, the property value, and its cash-flow potential.

Do your research beforehand. Your loan request will be thoroughly scrutinized by an underwriter. You will be required to have an appraisal conducted on the property. The more well-informed you are, the faster you will be able to get your loan approved!

At InstaLend, we provide single-family rental loans to investors across the nation. Since our loans are primarily asset-based, they’re easier to obtain than traditional loans; we don’t require income verification.

We create individualized loan programs that meet each client’s unique needs and expectations. Our single-family rental loans start at $75,000 with loan terms of up to 30 years. We also provide fix and flip loans, bridge loans, and new construction loans.

As your private lending partners, we put your real estate needs first. Apply for a loan or request a pre-approval. If you have any questions, contact our team without hesitation. We’re always happy to help!

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  • January 24, 2023
  • 5 min read
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