Credit score: Most lenders require a minimum credit score of 620, but having a score above 700 can increase your chances of approval and secure better interest rates. A higher credit score demonstrates financial responsibility and reduces perceived risk for lenders.
Debt-to-income ratio (DTI): Lenders generally prefer a DTI ratio below 43%, which means your monthly debt obligations, including your new mortgage payment, should not exceed 43% of your gross monthly income. This ratio assures lenders that you can handle the additional financial burden of a second mortgage.
Home equity: You will likely need at least 20% equity in your primary residence. Equity is the difference between your home’s current market value and the remaining balance on your mortgage. More equity can result in better loan terms, as it serves as collateral for the lender.
Income verification: Proof of stable income is crucial. Lenders typically require recent pay stubs, tax returns and bank statements to ensure you have a consistent income stream to cover your new mortgage payments.
Investment property plan: A clear plan for your investment property can strengthen your application. Lenders may want to see how you expect to generate rental income or increase property value. Having an organized, written description of your approach to marketing and managing the property will help to demonstrate that you can make the investment pay for itself.
Property appraisal: A professional appraisal of your current home may be required to verify its market value. This step assures the lender of the property’s worth and, crucially, helps determine how much money you will be able to borrow.
Cash reserves: Having cash reserves that can cover several months of mortgage payments can enhance your application. This reserve demonstrates financial stability and provides a safety net in case of unexpected financial challenges.