With the housing market hitting rock bottom prices around the country, many people are rethinking their investments. For some this has them looking into buying rental property and taking advantage of the low prices, with the added bonus of earning equity for retirement and a monthly income from rent.  Banks however, are not freely approving investment property mortgages as they once did. To qualify for an investment property mortgage you will have to have a significant amount of cash set aside for the bank to even considering approving you for a loan. This will give you a general idea of how much cash you will need on hand if you want to apply for an investment property loan.

Basic Calculation

Calculate about 25 percent to 30 percent of the home’s purchase price. This is your target amount of money to save. For example, if the purchase price of the rental home is $150,000, then you will need between $37,500 and $45,000 in the bank. This will cover the down payment and closing costs. If you already own a home that you live in, then the bank will also require more cash reserves. However, banks may not require that all the money be in readily available cash form.  

The Down Payment

You will need 20 percent of the home’s purchase price in cash to put towards a down payment. It’s now rare for banks to budge on this amount for investment property loans.

Closing Costs

You will need to figure about 0.5 percent of the rental property’s purchase price to estimate the closing costs. For rental homes, banks are less likely to allow this cost to be rolled into the loan, so you will need this in available cash.  For the $150,000 rental property, this would equal $7,500 that you would need in cash.

Financial Security

Mortgage companies want to know that giving you an investment property loan is a safe bet. Banks will now want to know that you have the financial security to pay both the mortgage on your primary residence and the mortgage on the rental home if you were to become unemployed and/or not have renters for a couple of months.

To prove you are financially stable and can afford more than one property, you will need to have about six months worth of monthly mortgage payments (including property taxes and insurance) available for the rental home. This does not necessarily need to be in cash however.  Many banks will allow you to include money in retirement funds to qualify for this criterion.

In addition to the six months of rental home payments, you will also need to have about two months worth of monthly mortgage payments, including taxes and insurance, saved for your primary home. Like the rental home mortgage savings, banks will tend to include money in retirement funds to allow you to qualify for this.

These are basic tips only for saving for a rental home purchase. Every lender has varying criteria that may or may not apply to your situation. Talk with a mortgage lender first, to determine what you need to qualify for an investment property mortgage.