Financing a Rental Property: Questions to Ask Your Lender

Financing a rental property starts with questions, not rates. Before you sign anything, ask your lender how they treat a house you plan to rent by the room, what cash you need at closing, and what happens to your loan terms if your plans change. This post gives you a question list to take to the meeting. It is general education, not financial advice, and returns are not guaranteed.

Financing a rental property: what to settle before you apply

Lenders sort loans by how you will use the house. A home you live in, a home you rent out whole, and a home you rent room by room can all land in different boxes. The label matters because it can change what you qualify for, what documents you provide and what the loan allows.

So the first job is to describe your plan plainly and ask how it is classified. Do not assume the answer from a friend's loan or a website. Ask the lender to put it in writing.

If you plan to live in the house and rent the other rooms, read our guide to house hacking. If you are a veteran, read house hacking with a VA loan and then ask your lender how they apply those rules.

Questions to ask about the loan and closing

The loan itself

Start with the basics. These questions help you compare lenders on the same terms.

• What loan types do you offer for the way I plan to use this house?
• Does renting by the room change how you classify the property or the loan?
• What is the interest rate, is it fixed or adjustable, and what is the term?
• Is there a prepayment penalty or a balloon payment?
• Is mortgage insurance required, and when can it come off?
• What is the annual percentage rate (APR), and how does it differ from the rate?

The Consumer Financial Protection Bureau explains that a Loan Estimate tells you important details about a mortgage you requested, and it advises you to request multiple Loan Estimates from different lenders so you can compare them. Put the estimates side by side and read the same line on each one.

Cash and closing

Many first-time rental buyers focus on the monthly payment and miss the cash needed up front. Ask about both.

• How much is the down payment for my situation?
• What are the lender fees, third-party fees and any points or credits?
• What is the estimated cash to close?
• How much do you want me to hold in reserves after closing?
• Will the lender require an appraisal, and how will it value a house used for rooms?

The same CFPB page notes that your Estimated Cash to Close is the estimated amount of money you will have to bring to closing. Treat that number as a floor for your planning, then add what the house needs before the first tenant moves in. That includes furnishing, which we cover in co-living operating costs.

Questions about rent income and your own numbers

How the lender counts rent

This is where rent by the room can differ from a single lease. Ask these directly.

• Will you count any rental income toward my qualifying income? If so, how, and what proof do you need?
• Do you want a lease for each room, or one lease for the house?
• Do you require a track record of rental income, or will you accept a projection?
• Does the lender limit the number of unrelated tenants or rooms in a house?

Do not assume the lender will count the rent you hope to collect. Some lenders count only part of it, some count none until you have a history, and some use different rules for a home you live in. Get the answer for your loan, not a general one.

Your own numbers

A lender can tell you what you qualify for. It cannot tell you whether the house is a good fit for your goals. That comes from your own budget.

Run the house through your numbers before you commit. Use the investor tools to run your own numbers with conservative inputs. Then leave room in the plan for months when a room sits empty or a repair lands at a bad time.

For reference, CoRent's host page shows an example house. In that example, a 7-bedroom house brings in $4,550 a month in rent, with the platform fee at $228 a month. The example is an illustration, not a prediction, and your house, your costs and your results will differ. Nothing on this page promises income.

Questions to ask yourself before you borrow:

• Can I cover the payment if one room, or two, is empty for a month?
• Do I have cash set aside for repairs that is separate from my down payment?
• Does the monthly cost still work if rates or insurance change?
• Who is on the loan, and what happens if I need to refinance or sell?

Local rules, taxes and your next step

Rules and taxes

Financing is only one layer. Before you close, check the rules that decide whether you can rent by the room in the first place.

• Does the city or county limit how many unrelated people can live in the house?
• Do zoning or permit rules apply to renting rooms?
• What does a landlord insurance policy cover for a house with several tenants?
• How will rental income and expenses be reported on my taxes?

On that last point, the IRS explains in Topic 414 that rental income is taxable and that real estate rental income and expenses generally go on Schedule E. A licensed accountant can tell you how that applies to you. Ask a local attorney or the city about zoning. CoRent does not give legal, tax or financial advice.

Bring a short list to every lender

Print the questions above, leave space for answers and ask each lender the same ones. Compare the Loan Estimates line by line. Write down who said what, and when. If an answer sounds too easy, ask for it in writing.

When you are ready to test a house, run your numbers on the investor tools. CoRent operates in Richmond, Petersburg and Colonial Heights, Virginia. You can read more about how the platform works for hosts and what it costs.

Frequently asked questions

Can I get a loan for a house I plan to rent by the room?

Possibly, but it depends on the lender and the loan type. Ask each lender how it classifies a house rented by the room, and get the answer in writing.

Will a lender count my expected room rent as income?

Lenders differ. Some count a portion of rent, some require a rental history first and some do not count it at all. Ask what proof each lender needs.

Is this financial advice?

No. This post is general education. Talk to a licensed lender, accountant and attorney about your own situation. Returns are not guaranteed.