According to a report from the National Association of Realtors, nearly a third of all houses sold in Texas in 2022 were to investors. Due to historically low interest rates leading up to 2022, this statistic should not be surprising. Investors wanting to generate passive income or profit from flipping a fixer-upper sought out Investment property loans.
Investment property loans can secure funding for various investment opportunities, including single-family homes, multi-family homes, vacation homes, non-warrantable condos, and high-rise commercial buildings.
Investment property loans can help you whether you are building up a real estate portfolio, flipping houses, or wanting to invest in a popular vacation spot. With Texas offering prime real estate locations, starting your investment journey in the Lone Star State is a great place to start.
Investment property loans allow real estate investors to purchase rental properties with less cash upfront. While a standard mortgage requires a 20% down payment, many lenders offer investment property loans with a minimum down payment of just 15%.
In this comprehensive guide we’ll explain what 15% down investment property loans are their pros and cons, eligibility requirements, and tips for getting approved.
What Are 15% Down Investment Property Loans?
15% down investment property loans, also known as rental property loans, allow borrowers to purchase a rental property with just a 15% down payment.
Traditional mortgages aimed at owner-occupants typically require a down payment of at least 20% But investment property lenders offer loans tailored specifically to real estate investors who are purchasing properties for rental income These loans have more flexible underwriting requirements,
The most common type of 15% down investment property loan is a conventional rental property mortgage Government-backed loans like FHA also allow 15% down payments on investment properties in certain cases
The lower down payment makes it easier for real estate investors to come up with the cash to purchase rental properties. But these loans typically have higher interest rates and require excellent credit.
Pros of 15% Down Investment Property Loans
Lower Cash Requirement
The biggest benefit of a 15% down investment property loan is the ability to buy a rental property with less money down. If you want to purchase a $200,000 rental property, a 15% down payment would be just $30,000 versus $40,000 for a 20% down traditional loan. This lower cash requirement makes it easier for real estate investors to purchase multiple properties and expand their rental portfolios.
Easier to Get Approved
Most lenders have more flexible debt-to-income (DTI) requirements and consider the projected rental income from the property rather than your personal income. This means you may find it easier to get approved, even if you have a lot of existing debt obligations or don’t earn a high enough salary to otherwise qualify for a mortgage.
Lower Mortgage Insurance
Loans with less than 20% down typically require private mortgage insurance (PMI), which protects the lender in case you default. On a 15% down investment property loan, the PMI premiums are lower than a loan with only 5-10% down.
Cons of 15% Down Investment Property Loans
Higher Interest Rates
The main trade-off for the lower down payment is that 15% down investment property loans have higher interest rates, generally around 0.25% – 0.5% higher than an owner-occupied mortgage. This equates to paying several hundred dollars more in interest each month.
More Cash Needed for Closing Costs
While you can buy the property with a lower down payment, you’ll still need cash for closing costs, which can amount to 3-5% of the purchase price. On a $200,000 rental property, expect to pay $6,000 – $10,000 in closing.
May Need to Pay Loan Origination Fees
Some lenders charge loan origination or underwriting fees on investment property loans. This 1% – 2% fee is based on the loan amount and adds to your total closing costs.
Risk of Higher Payments if Unable to Rent
As an investor, your mortgage approval is based on the home’s projected rental income. If you’re unable to find tenants right away or have periods of vacancy, you’ll be responsible for making the full mortgage payments out of pocket.
Eligibility Requirements for 15% Down Investment Loans
While underwriting is more flexible on 15% down rental property loans, lenders still have eligibility requirements you must meet:
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Credit Score: Typically a minimum 620 credit score is required, but many lenders look for at least a 680 FICO for the best rates.
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Down Payment Funds: You’ll need to verify the source of your down payment funds and prove the money is yours. Lenders want to see funds seasoned in your accounts for at least a few months.
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Reserves: Expect to show reserves equal to 6-12 months of mortgage payments. Reserves must be your own liquid funds.
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Property Type: Most lenders limit 15% down investment loans to 1-4 unit residential properties. Commercial properties or 5+ units often require 25%-30% down.
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Debt-to-Income Ratio: Your total debt payments, including the new mortgage, shouldn’t exceed 43% of gross income.
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Loan-to-Value (LTV) Ratio: The loan amount can be no more than 85% of the property’s appraised value. 15% must come from your own funds.
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Rental Income: Projected rents must be high enough to cover the new mortgage payment by a certain debt-to-income ratio, often 1.25.
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Landlord Experience: Some lenders require 1-2 years of experience managing rental properties already.
5 Tips for Getting Approved for a 15% Down Investment Property Loan
If you want the best shot at getting approved for a competitive 15% down investment mortgage, follow these tips:
1. Shop With Multiple Lenders
Compare loan estimates from 3-5 different lenders. This allows you to pit lenders against each other and negotiate for the lowest interest rate. Local banks, credit unions, and mortgage brokers are all good options.
2. Boost Your Credit Score
Aim for a credit score of at least 680. Pay down balances, dispute errors on your credit reports, and don’t open new credit cards before applying. Every point counts when it comes to getting approved and lowering your interest rate.
3. Verify Your Down Payment Early
Lenders will want to see your down payment funds seasoned in your accounts for 2-3 months at least. Don’t transfer funds between accounts or deposit cash right before applying.
4. Choose the Right Property
Opt for a 1-4 unit residential property in a promising rental location. Commercial properties often require 25% or more down. Steer clear of fixer uppers that won’t appraise for the purchase price.
5. Provide Detailed Rental Analysis
Work with your real estate agent to run comparable rent numbers and create an in-depth rental analysis. Also include info like average vacancy rates in the neighborhood. This will prove to the lender you can cover the mortgage.
Finding the Best 15% Down Investment Property Loan Lender
As an investor, it pays to shop around with various mortgage lenders to find the best 15% down loan option. Here are some recommended lenders known for competitive investment property loans:
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Min. Credit Score
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Loan Amounts
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Property Types
Different Kinds of Investment Property Loans
There are many different investment properties, and each has its unique requirements. However, here are some loan programs available for investment properties.
These loans offer the most flexibility when buying an investment property. They do not come with special requirements and tend to be the easiest to qualify for. Due to the fact they are not backed by the federal government, such as FHA loans, VA loans, or U.S. Department of Agriculture (USDA) loans.
Conventional loans come with 15, 20, and 30-year financing options based on the borrower’s financial and credit history. Interest rates will vary depending on the federal government rates and the borrower’s credit score. A 20% down payment is typically required.
Suppose you will hold your investment property in a Limited Liability Company (LLC), a legal business structure combining corporate and partnership features. In that case, you can go the commercial loan route. A commercial investment property loan can purchase anything from raw land medical office space to industrial warehouses.
Getting a real estate holding LLC can be advisable for borrowers who plan to have a portfolio of investment properties since you can only own up to ten houses in your name. An investor can only have ten single-family residence homes in their personal name.
Commercial loan terms, interest rates, and amounts vary. Contact a commercial lender early in the process for a consolation.
What are the requirements for an Investment Property Loan?
Investment property loan requirements vary depending on the lender you choose. Requirements also differ depending on the borrower’s credit history and financial worthiness. However, here are a few standard requirements that apply to most borrowers:
- High down payments: Depending on whether you use a conventional or commercial loan, you must put at least 20% down on your investment property. Down payment assistance programs cannot be used for investment loans, and traditional investment mortgages do not allow gifts when buying a rental home.
- Reserves: When making any significant financial purchase, the creditor or lender you choose to go with will require proof of funds. This amount varies, but creditors or lenders typically look for two to six months’ worth of mortgage payments.
How to Buy a Rental Property with 5% Down (Sneaky Tactic)
FAQ
What are 15 year investor mortgage rates?
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Rate This Week
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Rate Last Week
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15-Year Fixed
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7.16%
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7.29%
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Can I get an investment property loan with just 10% down?
It’s not impossible to get an investment property loan with just 10% down. It is, however, complicated. You may need to accept extra risk or inconvenience if you want to avoid the traditional 20% (or higher) down payment generally required for non-owner occupied investment loans.
Which lender is best for a low down payment?
We chose Quicken Loans as best for low down payment because it only requires a 3% down payment for conventional loans; it also lends nationwide, offers competitive rates and a wide variety of loan types, and makes applying for a mortgage online easy for borrowers.
How much is a down payment for investment property?
Key takeaways A down payment for investment property generally ranges from 15% to 25%. House hacking is a technique used by some real estate investors to reduce the down payment amount to as little as 3.5%. Loans backed by Fannie Mae and Freddie Mac are two options for financing an investment property.
What is the minimum down payment for an investment property loan?
15% down payment minimum: Most lenders expect a down payment of at least 15% on an investment property loan. But the exact down payment requirement will vary based on the risk tied to the loan, your experience in the industry, your income, and other financial factors.