How to Secure a 10% Down Investment Property Loan in 2023

Purchasing an investment property can be an excellent way to generate passive income. However, coming up with a 20-25% down payment on a rental property can be challenging for many real estate investors.

If your cash reserves are limited you may be wondering if it’s possible to buy an investment property with just 10% down. The good news is that there are financing options that may allow you to do just that.

In this comprehensive guide, I’ll explain everything you need to know about securing a 10% down investment property loan. I’ll cover topics like:

• Benefits of 10% down investment property loans
• Types of loans that allow 10% down
• Qualification criteria and requirements
• Step-by-step guide to getting approved
• Creative alternatives to bypass standard requirements
• Risks and drawbacks to consider

Let’s dive in!

What Are the Benefits of 10% Down Investment Property Loans?

Before we look at how to get approved for one, let’s first go over why you may want to pursue this type of low down payment loan option. Here are some of the biggest benefits:

• Requires less cash upfront – Only having to come up with 10% instead of 20-25% down is obviously easier on your wallet. This leaves you with more capital to invest in additional properties.

• Allows you to build equity faster – The lower your down payment, the sooner you’ll have 20% equity built up in the property. This opens up more financing options for future investments.

• Potentially lower monthly payments – Lower down payments often mean lower loan balances. This translates to lower monthly mortgage payments, making the property cash flow better.

• Easier to qualify than conventional loans – Programs like FHA, VA, and USDA have more lenient credit score and debt-to-income requirements than conventional mortgages.

As you can see, there are quite a few compelling reasons to look into financing investment properties with just 10% down. Next, let’s look at some of the most common loan programs that offer this.

Loan Programs That Allow 10% Down on Investment Properties

While rare, there are some specialized mortgage loans that allow real estate investors to put down as little as 10% on a rental property. Here are a few options to consider:

FHA loans

One of the most popular is an FHA loan insured by the Federal Housing Administration. The FHA will insure loans for investment properties with a minimum down payment of just 10%.

The property can be a single-family home, duplex, triplex, or fourplex. You’ll occupy at least one of the units for at least a year. FHA loans offer competitive interest rates and smaller down payments for buyers with lower credit scores.

VA loans

If you’re a veteran or active military, a VA investment property loan may only require 10% down. You can purchase a single-family home or a property with up to four units. As with FHA loans, you’ll need to live in one of the units initially.

USDA loans

For investment properties located in rural areas and small towns, USDA loans offer 100% financing. The eligible property can be a single-family home, duplex, triplex, or fourplex. At least one unit must be your primary residence to start.

HomeReady & Home Possible

These two conventional mortgage programs offered by Freddie Mac and Fannie Mae allow down payments as low as 3%. You must occupy the property for at least a year. Income limits apply based on the property’s location.

Construction loans

If you plan to build a new investment property, construction loans only require 10-20% down. You draw funds as needed to pay contractors during the building phase.

Portfolio loans

Some banks and credit unions offer portfolio loans for investment properties, which are loans they keep in-house rather than selling to investors. These lenders have more flexibility and may allow 10% down.

Hard money loans

Also known as bridge loans, hard money loans come from private investors rather than banks. They carry higher rates and fees but often only need 10% down or less.

As you can see, there are several loan programs available that allow real estate investors to buy rental properties with just 10% down. Next, let’s look at what it takes to qualify.

Qualification Criteria for 10% Down Investment Loans

While low down payment investment property loans exist, qualifying for one takes some work. Lenders have stricter requirements compared to owner-occupied mortgages. Here are some factors they’ll evaluate:

• Credit score – Most programs require a 620 FICO score or higher. The better your credit, the more options you’ll have.

• Debt-to-income ratio – Your total monthly debt divided by gross monthly income. Most lenders look for less than 45%.

• Cash reserves – Expect to have at least 6 months of mortgage payments in the bank after closing. Some want 12 months reserves.

• Rental income – If relying on rental income to qualify, you’ll need a signed lease agreement and proof of regular deposits.

• Seasoning of assets – Funds for down payment and reserves must be seasoned in your accounts for at least 60-90 days in many cases.

• Background check – Your income, employment, and rental history will be verified along with a credit check.

• Property analysis – The lender will assess the property’s value, condition, cash flow potential, and local rental market data.

The lender needs to feel confident you can manage the property responsibly and handle the loan payments each month. Having a solid credit score, money in the bank, and some real estate or property management experience helps a lot.

Step-by-Step Guide to Getting a 10% Down Investment Loan

If you meet the basic eligibility criteria above, follow these steps to get approved and close on a 10% down investment mortgage:

1. Check your credit – Order credit reports and review your scores several months before applying for financing. If needed, take steps to improve your credit profile.

2. Save for your down payment & closing costs – Come up with at least 10% of the purchase price for the down payment, plus several thousand for closing. Season the money in your accounts.

3. Choose the right property – Select an investment property in a strong rental market. Do market research to estimate cash flow, expenses, and ROI.

4. Find the right lender – Shop around with banks, credit unions, and mortgage brokers to find one that offers portfolio loans or the loan programs outlined above.

5. Submit your application – Provide all required documentation including financial statements, tax returns, lease agreements, and bank statements.

6. Get an appraisal – The lender will order an appraisal to confirm the property’s fair market value supports the purchase price.

7. Close on time – Finalize the transaction on schedule after the financing and property inspections are completed.

The entire process usually takes 30-60 days from start to close. Having an experienced real estate agent and mortgage broker on your side can help expedite the process.

Creative Alternatives to Bypass 10% Down Requirements

The loan programs above each have their own specific rules. If you don’t quite qualify for them, here are a few creative workarounds to potentially bypass standard 10% down requirements:

• Use a HELOC or cash-out refinance – Tap into your home equity line of credit or refinance an existing property to get funds for the down payment.

• Take on a business partner – Team up with another investor and combine your resources to come up with the full down payment.

• Ask the seller for financing – Request that the property seller carries back part of the purchase price to lower your loan amount.

• Make an all-cash offer – Use private money or hard money loans for the entire purchase price if you can repay quickly. This shows the seller you’re qualified.

• Lease with option to purchase – Lease the property first with an option to buy it outright later once you have more cash.

• Use a self-directed IRA – Invest money from your IRA if you have substantial retirement savings. This bypasses income requirements.

These alternative strategies take some extra effort and paperwork but may help you secure an investment property when traditional financing falls through. However, they also involve increased risk in most cases.

Risks and Drawbacks of Small Down Payment Investment Loans

While attractive for the lower cash requirement, there are some potential downsides to be aware of with 10% down investment property loans:

• Higher interest rates – Low down payment loan programs often come with a slightly higher interest rate, adding to your total costs.

• Mortgage insurance – Lenders typically require private mortgage insurance on loans with less than 20% down, adding an extra monthly fee.

• Prepayment penalties – Some investment property loans impose penalties if you refinance or sell the property within the first 3-5 years of the loan.

• Lower cash flow – With less equity invested upfront, it takes longer for your rental