20% down line of credit available for rental real estate

Lines of credits are now available on rental property.  Payment terms are interest only and the rate is at prime.  The line of credit is 100% open with no penalties.

What is the cost for Mortgage Insurance?
With 20% down the mortgage is conventional and no mortgage insurance is required.

Underwriting Fee: There is no underwriting fee for conventional mortgages.

Mortgage Rates: Prime lending rate.

Net Worth
The requirement for a minimum net worth varies from lending institution to lending institution. Most lending institutions do not have a minimum net worth, however some require that you have a minimum $100,000 net worth per property.

Debt Coverage Ratio
The requirement for debt coverage ratio varies from lending institution to lending institution.  Some institutions will use rental off set for qualifying purposes. While other lending institutions will use 1.10% debt coverage ratio.

1.10% debt coverage ratio is arrived at by dividing the Net Operating Income by the Debt Service.  (Please see Debt Coverage Worksheet below.) 

20% Down Line of Credit  (Debt Coverage) Example:

• Purchase price of $281,250
• Line of credit of $225,000 at 6.25%
• $1473.17 P&I
• Monthly rent is $2000

Potential Gross Income (Monthly Rent x 12):	(a)	$ 24,000
Less: Vacancy and Bad Debt Allowance (5%):	(b)	$ -1,200
Effective Gross Annual Income:	(a) + (b) = (c)	$ 22,800
Taxe:		$2,400
Maintenance and Repairs (5%:		$1,200
Management Expenses (5%):		$1,200
Total Annual Operating Incom:	(d)	$4,800
Net Annual Operating Incom:	(c) - (d) = (e)	$18,000
Annual Debt Service (Annual P & I:	(f)	$14,676
Debt Coverage Ratio (Minimum of 1.10): (Divide net annual operating income by the annual debt service)	(e)/(f) = (g)	1.02

Download Worksheets:

• Rental Property Cash Flow Analysis (1.10% Excel Worksheet 1)
• Property Income and Expense Analysis of all Properties Owned (1.10% Excel Worksheet 2)

20% Down Line of Credit (Rental offset) Examples:

• Purchase price of $281,250,000
• Mortgage of $225,000 at 6.15% (Clients must qualify at the 3 year posted rate)
• $1,459 P&I
• Monthly rent: $2,000

Rental off set is when a lending institution uses 70% of the rental income and off sets it against the P.I.T.  Only the shortfall will be included in the Debt Ratio.  If there is a rental surplus this will be added to the client's income.  Assume a rental property with P.I.T. of $1,659 and rental income of $2,000. We will take 70% of the $2,000 income ($1,400) and deduct that from P.I.T. ($1,659). We will only add the $259 shortfall to the Debt Ratio.

Download Rental Offset Worksheet:

• Rental Income and Expense Breakdown (Rental Offset Excel Worksheet)