If you’re looking to generate some extra income with a rental home or buy a fixer-upper to flip for a profit, an investment property loan may be in your future. However, investment property mortgage rates are typically higher than what you pay for a primary residence, and you’ll need to meet stricter qualifying requirements.
Knowing the ins and outs of investment property loan programs will help you choose the right mortgage for your real estate investment goals.
Investing in real estate can be a great way to build long-term wealth However, financing an investment property purchase requires navigating some extra paperwork compared to buying a primary residence So what specific loan document labels a property as an investment purchase?
When taking out a mortgage loan to finance an investment property, there are a few key loan documents that indicate the property will be used for investment purposes rather than as a primary residence.
The Mortgage Agreement States the Property Use
The primary loan document that denotes a property as an investment is the mortgage agreement or loan agreement This legal contract between the borrower and lender outlines all the terms and conditions of the loan
Within the mortgage agreement, there is usually a section that asks the borrower to specify the intended use of the property The borrower can indicate whether the property will be used as a primary residence, secondary residence, or investment property
Clearly marking the property as an “investment property” in this section of the mortgage agreement signals to the lender that this property will be used to generate rental income, rather than for the borrower’s housing needs.
The Uniform Residential Loan Application
Another important document that indicates an investment property purchase is the Uniform Residential Loan Application, also known as Form 1003.
This standard loan application requires borrowers to provide details about their finances as well as information about the property. Within Section 4 of the form, titled “Property Information and Purpose of Loan,” the borrower must choose whether the property will be used as a “Primary Residence,” “Secondary Residence,” or “Investment.”
Again, indicating “Investment” purpose clearly distinguishes this as a financial asset rather than a homestead property.
Multifamily Properties Have Added Documentation
For multifamily properties where the owner plans to occupy one unit and rent the others, there are some additional documents required:
- Rental schedule: Documents projected rental income and expenses on other units
- Leases: Copies of current tenant leases prove rental income
- Multifamily worksheet: Details financing structure across multiple units
Providing current leases and rental forecasts further confirms the investment status of the property.
The Appraisal Labels the Property Type
During the underwriting process, the lender will order an appraisal to determine the market value of the property.
The appraisal report will also include identifying details about the property, including labeling it as a “single family residence,” “condominium,” “2-4 unit multifamily,” etc.
If the appraiser labels the property as anything other than a single family home, it suggests the property will be used as a rental, not primary residence.
Declarations of Occupancy Status
For conventional loans, lenders may require borrowers to sign a statement declaring they will not personally occupy the property. This Declaration of Occupancy certifies the home is strictly an investment asset.
Government-backed FHA and VA loans require a similar Owner Occupancy Certification agreeing the borrower will take up residence in the property if it has 2-4 units.
Reviewing the Full Loan File
While the mortgage agreement and loan application are key identifiers, the loan officer will look holistically at the full loan documentation package before classifying the property.
Income sources, employment details, property type, appraisal label, and any occupancy declarations or certifications help build the full picture of property usage.
Reviewing the complete loan file ensures the lending team has accurate understanding of the property as a financial investment rather than a residence. This affects mortgage eligibility requirements.
Why Defining Investment Status Matters
Clearly stating the investment status of a property in loan documents is important for several reasons:
Loan eligibility – Investment properties require larger down payments, higher credit scores, and stricter debt-to-income ratios. Defining the status ensures the right loan program.
Mortgage rates – Investment loan rates are typically 0.50% – 0.75% higher than owner-occupant loans. Identifying usage ensures proper rate assignment.
Underwriting – Rental income can be counted toward loan qualification. But lenders verify this with rent rolls, leases, and multifamily worksheets when applicable.
Tax implications – Investment properties have different tax deductions compared to primary residences. Loan documents should match intended use.
Properly labeling the property purpose on all loan paperwork ensures regulatory compliance and qualification for investment property financing.
Final Thoughts
When seeking financing for real estate investing, take care to mark the property as an “investment” on key documents like the mortgage agreement, loan application, appraisal, and any rental income forms or occupancy declarations required by the lender.
Carefully completing these loan documents accurately reflects the business purpose of the property rather than personal residential use. This allows the lender to correctly apply investment property guidelines, mortgage rates, and tax considerations for the loan.
With the right documentation and understanding of investment property qualifications, real estate investors can smoothly finance the purchase of properties that will generate ongoing rental income and build long-term wealth.
Minimum requirements for investment property loans
Lenders consider investment property lending riskier than lending on a primary residence. As a result, the qualifying rules require you to show more financial stability. Requirements unique to investment property loans include:
- Higher down payments. You can purchase a multifamily home with an FHA or VA loan with only 3.5% if you intend to live in one of the units. Although conventional guidelines permit down payments as low as 15% for rental homes, most lenders require at least 20%. And the money must be all yours — gifts aren’t allowed when buying a rental home with conventional guidelines. However, down payment gifts are allowed for VA and FHA multifamily home purchases.
- Reserves. More commonly called “mortgage reserves,” these are monthly payments the lender wants to see in the bank. The amount usually equals two to six months’ worth of mortgage payments, depending on how many properties you own.
- Proof of rental income. The lender may require copies of current leases, a rent roll history and tax returns showing rental income. In most cases, the appraisal will also include an analysis to confirm what similar properties rent for in the neighborhood.
- Using rental income to qualify. Lenders may allow you to add the actual or estimated rental income from the home you’re buying to qualify. For example, FHA and VA multifamily loan guidelines will count rent payments received from the units you’re not living in toward your qualifying income.
- History of property management. Some loan programs require you to document or explain your experience renting properties. Others may require tax returns showing you’ve previously managed rental homes.
- Higher credit score requirements. You’ll need a minimum credit score of 640 for an investment property mortgage, although the requirement may jump to 700 or higher if you’re buying a multifamily home.
Investment property loans are meant for rentals A true investment property loan assumes you won’t be living in the property you purchase and will rent it out to tenants to earn rental income. You may also use some standard loan programs to purchase multifamily investment homes if you plan to live in one of the units.
An investment property is real estate you buy to make income. The term “investment property” can apply to everything from a one-unit condominium to a high-rise commercial building in a city. However, for the purposes of this article, we’re focused on residential real estate loans, which only allow financing on properties between one and four units. Residential investment home types include:
- Condominiums
- Manufactured homes
- Multifamily homes
- Cooperatives
Invest In Real Estate Without Income History (DSCR Loans)
FAQ
What is a loan for an investment property called?
What determines an investment property?
How does the IRS define investment property?
How to know if a rental property is a good investment?
What is an investment property loan?
An investment property loan is a mortgage for the purchase of an income-producing property. That includes buying properties to generate rental income or to renovate and sell for a profit (more commonly known as house flipping). There are also short-term hard money investor loans, allowing you to buy properties you plan to repair and sell quickly.
How do investment property loans work?
Investment property loans are a lot like ‘standard’ mortgages, provided you want to buy a home with 1-4 units. Verify your investment property loan eligibility. Start here The application and approval processes work the same way, and mortgage rates are usually less than 1% higher than for a standard mortgage.
How do I get financing for my investment property?
Once you have decided that investing in real estate is right for you, done your research, and found a good deal, you need to consider how to secure financing for your investment property. Four types of loans you can use for investment property are conventional bank loans, hard money loans, private money loans, and home equity loans.
What is investment property financing?
An investment property is any real estate that you buy in order to make a profit, rather than to use it as a residence for you or your family. What Are Requirements to Be Approved for Investment Property Financing? Each lender and type of financing will have varying requirements. Private lenders may simply require a relationship with the borrower.