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What Is Buy To Let Mortgage And How One Can Get It?

What Is Buy To Let Mortgage And How One Can Get It?

Amanda Byford
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About Buy To Let Mortgage

In recent times many people are looking to purchase investment properties to have a passive income by putting the properties on rent. 

When it comes to investment properties, the process of taking a mortgage is similar to that of a primary home; however, there are a few key differences. In this post, we will learn what is a buy to let mortgage, and how it works.

What Is Buy To Let Mortgage?

A buy to let (also known as BTL) mortgage is a mortgage taken on a property that the borrower rents out to make a profit. 

BTL mortgages have a higher rate of interest and stricter lending guidelines compared to conventional mortgages, including a higher down payment. 

To be eligible for a BTL mortgage, the minimum down payment required is twenty-five percent of the property value.

How Does A Buy To Let Mortgage Work?

To get a BTL mortgage, the borrower needs to meet basic requirements as listed below:

As mentioned above, you will need a minimum of 25% down payment to buy an investment real estate property depending on your credit rating. 

Mortgage requirements for renting a property are less strict if you plan to live in the house. Let’s say you buy a two-unit townhouse and plan to live in one of the units. In such a case, you can make a 15% down payment.

If you are looking to have an even lower down payment than 15%, you can consider an FHA or VA loan to purchase your investment real estate property. 

If you do not have enough down payment to qualify for a conventional BTL mortgage, using FHA or VA loan for buying an investment property may lower your down payment requirement.

You can also use potential rental income to obtain a BTL mortgage. Lenders will consider $ 0.75 for every dollar based on the current market rental rate if you consider rental income in your application. 

If the market rental price of a property that is similar to the investment property you are buying is $ 1,500 per month, the lender will consider $1,125 per month while calculating your income ratios.

The stronger your overall financial profile, the more flexibility a lender can offer with down payment and interest rate requirements. 

High credit scores, combined with six-month cash reserves and a low debt-to-income ratio (DTI), are key to approving buy-to-let mortgages. 

The minimum credit scores most lenders require for qualifying for a BTL mortgage are 680 to 700. If you have a credit score better than that there is a possibility that you can qualify for a better interest rate.

A six-month cash reserve is necessary for repairs and reimbursement of rental costs, which will inevitably be reflected. Owning a rented property means that you are responsible for the maintenance, repair, and other property-related costs.

Where To Get Buy To Let Mortgages?

There are many options if you are looking for a BTL loan for your investment property purchase.

Traditional BTL mortgage lenders – banks, credit unions, and even online lenders – check your credit report and your general finances to see if you can afford one.

On the other hand, hard money lenders are private investors who specialize in buy-to-let mortgages. 

They may be willing to finance a mortgage without a credit check, but you will pay a higher interest rate for such type of loan. 

The repayment term is shorter compared to a conventional lender. Hard money loan providers also charge fees that may also include prepayment penalties and often require a higher down payment, usually up to 30%.

Conclusion

The primary reason to buy an investment property is to gain profit. Hence when you are looking for buy-to-let options, you must check all the possible options. 

Even if you decide to go with buy to let mortgage, you need to see that you are making enough profit over your mortgage and property costs.

Amanda Byford

Amanda Byford has bought and sold many houses in the past fifteen years and is actively managing an income property portfolio consisting of multi-family properties. During the buying and selling of these properties, she has gone through several different mortgage loan transactions. This experience and knowledge have helped her develop an avenue to guide consumers to their best available option by comparing lenders through the Compare Closing business.

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