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.
Investment loans for rental property can be a great way for real estate investors to expand their portfolio and generate passive income. However, obtaining financing for a rental property investment can be more complicated than getting a standard mortgage.
In this comprehensive guide, we’ll cover everything you need to know about getting investment loans to purchase rental real estate.
What are Investment Loans for Rental Properties?
Investment loans, also known as rental property loans, are mortgages specifically designed for financing real estate that will be used as a rental investment.
Unlike primary residence mortgages, rental property loans typically have stricter requirements and higher interest rates to compensate lenders for the increased risk
The loan proceeds can be used to purchase single-family homes, multi-family properties, condos, townhomes or manufactured homes that will be rented out to tenants.
Obtaining investment financing allows real estate investors to leverage other people’s money. This increases potential returns as long as risks are managed prudently.
Benefits of Using Leverage with Rental Property Loans
- Purchase more properties than possible with all cash
- Increase cash flow and returns
- Deduct mortgage interest expenses to reduce taxable income
- Build equity faster through principal paydown and appreciation
Leverage does come with risks, so investors should be conservative and maintain adequate cash reserves. But used judiciously, rental property loans provide significant advantages.
Options for Financing Rental Investments
There are several sources investors can consider when looking for investment loans for rental properties:
Conventional Loans
These standard mortgages from banks and mortgage lenders offer competitive rates and terms. Down payments are usually at least 20-25%. Investors may be limited to around 4 loans with the same lender.
FHA Loans
FHA loans require lower down payments and minimum credit scores. They allow rental income to help qualify. Good for new purchases or renovations.
VA Loans
No down payment is required for VA loans. Qualified borrowers can purchase multifamily properties of up to 4 units. At least one unit must be occupied by the borrower.
Portfolio Loans
Private lenders offer discounted “package deals” on multiple mortgages. May have higher fees or prepayment penalties.
Blanket Loans
A single loan to finance multiple rental properties. Properties are cross-collateralized. May include a release clause.
Private Money Loans
Experienced investors provide financing in return for a share of profits or reduced fees/rates.
Seller Financing
Sellers act as the lender and receive payments over time. Requires thorough underwriting.
Home Equity Loans
Cash-out refinance or HELOC using equity in existing property. Rates may be higher than other options.
Each source has pros and cons to weigh. Working with an experienced broker can help identify the optimal loan program.
The Rental Property Loan Application Process
The loan application process for rental investments closely resembles that of primary residence mortgages:
- Get prequalified – Confirm amount qualified to borrow
- Find a property – Make offer contingent on financing
- Apply for loan – Submit application and required documents
- Lock interest rate – 60-90 days before closing
- Underwriting – Loan reviewed and approved
- Closing – Sign final papers and take ownership
Working with a knowledgeable lender familiar with investment property loans can streamline the experience.
Typical Requirements for Financing Rental Property
While specific requirements vary, rental property loans generally have stricter criteria than primary residence mortgages:
- Down payment – Usually 20-25% minimum
- Credit score – 620+; 700+ for best terms
- DTI ratio – Total debt below 45% of income
- Reserves – 6+ months expenses in liquid assets
- Property Type – Single-family, 2-4 units; condos or townhomes
Documention like tax returns, bank statements, W-2s, and lease agreements are also needed.
How Much Can be Borrowed?
Loan limits depend on the type of loan and location. Jumbo loans have no preset limit. Government loans and conforming loans adhere to maximum amounts based on local home values.
Work with a lender to determine the maximum loan amount for a given property. Do not over-leverage the investment to avoid problems when rental income fluctuates.
Interest Rates on Investment Property Loans
Interest rates on rental property loans tend to be 0.5 – 1% higher than primary residence mortgage rates.
This compensates the lender for increased risk. Rates also depend on factors like credit score, down payment, property type and current market conditions.
Shopping around helps investors find the most competitive interest rates for their situation. Our online tool makes it easy to compare personalized quotes from multiple lenders at once.
Using Rental Income to Qualify
A major advantage of rental property loans is the ability to use future rental income to help qualify. This increases purchasing power.
Lenders typically allow 75% of projected rents to count as income, minus 25% for vacancies and expenses. Documentation like leases or appraisals are required.
Conservative projections advised as actual rents may be lower than expected. Ensure adequate reserves and existing income even without rental income.
Tax Advantages of Rental Property Loans
Investment real estate provides a number of valuable tax advantages, including:
- Deductible mortgage interest
- Depreciation deductions
- Deductible repairs and maintenance
- Reduced capital gains upon sale
Consult a tax professional to optimize tax planning when using leverage to purchase rental property.
Tips for Getting Approved
Here are some tips to improve the odds of getting approved for the best rental property loan:
- Aim for 720+ credit score
- Put at least 20-25% down
- Keep debt-to-income ratio below 40%
- Have 6+ months of mortgage reserves
- Use a experienced mortgage broker
- Document rental income conservatively
- Select profitable rental markets
- Start small if new to investing
While financing costs are higher, the income potential makes rental property a smart investment for many. By understanding the loan process and requirements, real estate investors can successfully fund future acquisitions.
Common Concerns about Rental Property Loans
Many first-time investors have additional questions about obtaining financing on rental real estate. Here are answers to some common concerns:
Do I need a 20% down payment?
Most lenders require a minimum of 20% down for investment loans. But some options like FHA allow less. Shop around for the best combination of down payment and interest rate.
What if I don’t have traditional income to qualify?
You can use projected rental income from the property instead of W-2 income to qualify. Retirement account distributions also count as income.
What property types can I finance?
Nearly any property that appraises and has habitability can be eligible. This includes single-family homes, duplexes, triplexes, fourplexes, condos, townhomes, and manufactured homes.
Can I use an LLC to purchase?
Financing in an LLC is possible but adds complexity. Most first-time investors should buy personally to simplify the loan process.
What if I have less than a 620 credit score?
Those with lower scores may still qualify by putting down a larger down payment, often 35% or more. Hard money loans are another option but come with higher costs.
Are investment loans difficult to obtain?
During strong economies funding is readily available. In downturns, lending may tighten but qualified buyers can still receive financing in most cases.
How many investment loans can I have?
Many conventional lenders limit individuals to 4-10 financed properties. Portfolio lenders and private money sources can provide additional financing capacity.
Final Thoughts on Financing Rental Properties
Investment loans enable real estate investors to amass a portfolio of income-producing rentals. While financing costs are higher than primary residences, the income potential makes leveraging rental properties attractive.
By understanding loan programs, requirements, and interest rates, investors can secure competitive financing for future property acquisitions. Conservative underwriting helps ensure positive cash flow even if rents decline.
Work with an experienced broker to explore your rental financing options. With the proper funding strategy, rental property investments can generate stable long-term returns.
Investment property loan options
There are several programs to choose from when you’re purchasing investment homes.
- Conventional loans. The only standard loan program that allows you to buy an investment property with no strings attached is the conventional loan program. Unlike with government-backed mortgages, you don’t have to live in the property to qualify.
- FHA loans. You can buy a two- to four-unit home with an FHA loan — a mortgage backed by the Federal Housing Administration (FHA) — and collect rent on the other units to qualify, as long as you live in one of the units for at least 12 months.
- VA joint loans. This VA multifamily loan program is exclusively for eligible military borrowers. It allows them to buy a property with up to seven units, as long as they live in one of the units. The U.S. Department of Veterans Affairs (VA) guarantees these loans with no down payment requirement.
- Non-QM loans. Borrowers that don’t qualify for any of the programs above may be eligible for a nonqualified mortgage (non-QM) loan based exclusively on the rental income received on the home they’re buying. The down payment requirement and interest rates are higher than with regular loan programs.
- Owner financing. Sometimes sellers are willing to act as a lender and provide temporary financing so you can purchase the home in exchange for a large nonrefundable down payment. Some owner financing arrangements include a balloon payment, which means you’ll have to pay off the entire loan balance within a set period, or the owner takes back the property.
- Home equity loan. If you currently own a home with a good chunk of equity, you can borrow against the equity with a home equity loan or a home equity line of credit (HELOC). With home equity loans and HELOCs, you borrow a portion of your equity and leave your current mortgage loan in place. A home equity loan is paid in a lump sum with a fixed rate, while a HELOC works more like a credit card that you can use and pay off for a set time.
- Cash-out refinance. A cash-out refinance is when you take out a mortgage for more than you owe and pocket the difference in cash, which can be used to purchase an investment property.
- Hard money loans. These loans are more common for flipping investors — hard money investors are willing to lend you money knowing you’ll pay it off quickly. However, you’ll often need at least a 25% down payment and will pay high rates and upfront points. And it’s not uncommon for there to be a prepayment penalty.
How to get an investment property loan
The process for getting an investment loan requires a few extra steps in the mortgage process.
Shop around for an investment property mortgage lender.Most lenders offer some type of investment property loan option, but the rates may vary significantly between companies. Not all lenders offer non-QM loans, so you may have to make some extra calls if you need one. Hard money lenders are often private individuals or partnerships — ask your real estate agent or other real estate investors for recommendations.
Fill out a loan application.If you’re applying for a standard loan program like a conventional, FHA or VA loan, the process is similar to any other type of loan. However, non-QM lenders and hard money lenders may have their own process or application system.
Provide extra asset documentation.Have at least two months of bank statements and any current leases or rental information on the property you’re purchasing. Lenders typically permit you to use a percentage of your retirement or 401(k) vesting toward your reserve requirement, so have a current statement handy.
Pay for an investment appraisal.The home appraisal process requires an extra report detailing the average rent collected on similar homes in the area. In some cases, the rental income from this report can be used to help you qualify for the loan.
Review your closing disclosure.After your loan conditions clear and the appraisal is completed, the lender will issue a closing disclosure three business days before closing. Review it to make sure all the figures are what you expected. If you’re taking out a hard money loan, make sure you understand any prepayment penalties or “guaranteed interest” language. Typically hard money lenders want to make a set amount of interest, regardless of how quickly you pay back the loan.
Gather your funds and close.You’ll send a wire or bring a cashier’s check for your closing funds. Once the mortgage closing paperwork is signed, your loan funds are sent, and the property is recorded in your name.
Invest In Real Estate Without Income History (DSCR Loans)
FAQ
What is the 2% rule for investment property?
Is it harder to get a loan for an investment property?
Can I put less than 20% down on an investment property?
What is a loan for an investment property called?
Should you invest in a rental property loan?
However, the slightly more restrictive terms on a rental property loan can work in favor of the real estate investor. Interest payments can be completely expensed as a tax deduction by investors. A bigger down payment creates a lower loan-to-value (LTV) ratio, with a lower mortgage debt service payment amount and potentially increased cash flow.
Do you offer investment property loans for residential rental properties?
We offer a variety of investment property loans for qualifying residential rental properties. What’s an investment property loan? Investment property loans are used for the purchase of second homes and investment properties, including one- to four-unit residential properties and vacation properties.
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 mortgage loans work for investment rental properties?
Using mortgage loans for investment rental properties, allows investors to take advantage of the power of financial-leverage through rental real estate to generate significant profits when done correctly. A mortgage typically works by using the subject property (or other assets) as collateral for a loan.