Owning rental property can be a great investment, allowing you to build equity and earn monthly rental income. But financing a rental property requires careful consideration, especially when it comes to the type of mortgage loan you choose. Many investors wonder if it’s possible to get a traditional 30-year fixed-rate mortgage on an investment property, rather than a shorter-term loan.
The Short Answer
Yes, it is possible to get a 30-year mortgage on a rental property in most cases. However, there are some additional requirements and restrictions compared to getting a standard 30-year mortgage on a primary residence.
Qualifying for a 30-Year Rental Property Mortgage
While 30-year mortgages are commonly used for primary residences, you typically need to meet stricter criteria to qualify for one on a rental property:
- Higher down payment – Lenders usually require a down payment of at least 25% for an investment property mortgage.
- Better credit – Most lenders want a minimum credit score around 680 for a 30-year rental property loan.
- Lower debt-to-income ratio – Your total monthly debt payments, including the new mortgage, should not exceed 43% of your gross monthly income.
- Additional reserves – You may need up to 6-12 months of mortgage payments in reserve assets.
- Increased interest rates – Interest rates are usually 0.5% – 1% higher compared to a primary residence.
Meeting these qualifications demonstrates to the lender that you can comfortably afford the rental property, even if you suffer periods of vacancy.
The Benefits of a 30-Year Mortgage Term
Opting for a longer 30-year loan term on a rental property has some potential advantages:
- Lower monthly payments – Since the mortgage loan is amortized over 30 years, your monthly payment is lower compared to a 15 or 20 year mortgage.
- Increased cash flow – The lower payment may mean greater positive cash flow when rents exceed your expenses.
- Fixed rate stability – You lock in a consistent mortgage rate for the full 30 years, avoiding unpredictable rate hikes.
- Extended investment horizon – You have more time to earn rental income and benefit from property appreciation.
For investors who want to minimize expenses and maximize recurring cash flow, the 30-year term is appealing. You retain more rental income each month to save, invest elsewhere or pay other bills.
The Downsides of a Long Mortgage Term
However, the 30-year rental property mortgage also has some potential drawbacks to weigh:
- Higher interest costs – Since you pay interest over 30 years rather than 20 or 15, your total interest paid is greater.
- Slower equity build – You may build equity in the property more slowly compared to shorter term mortgages.
- Refinancing risks – If rates drop in the future, you cannot refinance as quickly as with a 15 or 20 year term.
- Less flexibility – You are committed to owning the rental property for a longer timeframe.
If your investment goals prioritize quickly paying down the mortgage and maximizing equity, a shorter term loan may be preferable.
30-Year Mortgage Options for Rental Properties
The most common type of 30-year mortgage loan for rental properties is the conventional fixed-rate loan. However, depending on your finances and goals, other options may be available as well:
Conventional Fixed-Rate
This standard mortgage offers predictable interest and principal payments that stay the same over the full 30 year amortization. Conventional loans can be obtained once you meet the typical minimum 25% down payment requirement.
FHA Loan
FHA loans only require a 3.5% down payment and have looser credit standards compared to conventional mortgages. However, they charge an upfront mortgage insurance premium and ongoing monthly premiums.
VA Loan
For eligible military veterans and service members, VA loans offer zero down payment options on rental properties. Credit and income requirements are also relatively lenient compared to conventional mortgages.
USDA Loan
In designated rural areas, USDA loans can provide 100% financing for rental properties. Applicants must be unable to secure reasonable credit terms through other lenders. USDA loans have income limits based on the property’s location.
Jumbo Loan
If you need to finance a higher-value luxury rental property, jumbo mortgages exceed the standard conforming loan limits set by the Federal Housing Finance Agency. Down payments between 20-30% are typically required.
30-Year Interest-Only Mortgage
One less common option is the 30-year interest-only mortgage. With an interest-only loan:
- You only pay interest, no principal, for the first 5-10 years of the loan.
- After the interest-only period ends, you begin making full principal and interest payments amortized over the remainder of the 30 year term.
- Your payment will jump substantially once the full payments kick in.
Interest-only loans allow greater cash flow in the short term, but less equity build up. The higher monthly payments after the interest-only period also increase your risk of default or inability to refinance.
Tips for Getting Approved
To boost your odds of qualifying for a 30-year mortgage on a rental property, consider these tips:
- Shop lenders – Compare multiple lenders like banks, credit unions, and online lenders to find the best rates/fees.
- Increase your down payment – Aim for at least 25-30% down if possible.
- Pay down existing debts – Reducing credit card balances and other debts boosts your debt-to-income ratio.
- Choose lower-priced properties – Opting for less expensive properties that meet lender guidelines improves your chances.
- Raise your credit score – Take steps to increase your score above 700 through on-time payments, lowering utilization, etc.
- Document rental demand – Show there is strong demand in the area for the type of rental you plan to operate to reassure lenders.
With proper preparation and financial diligence, you can show lenders you have the means to successfully manage rental property financed with a long-term 30-year mortgage.
Conclusion
Getting a 30-year mortgage on a rental property is possible with the right qualifications, but involves stricter standards than primary residence loans. While 30-year loans reduce your monthly payments, allowing greater recurring cash flow, they result in higher total interest costs and slower equity accumulation than shorter terms. Investors should weigh these pros and cons carefully when financing rental properties with leverage. With proper financial planning, a 30-year fixed-rate mortgage can provide an affordable way to invest in real estate rentals.