Using other people’s money by getting a loan on a rental property can be a good way to increase potential returns as long as you conservatively balance risk with reward.
In this article, we’ll look at the options for getting a rental property loan and discuss how to analyze cash flow and property value to help you make the best investment decision.
Owning rental property can be an excellent way to generate passive income. But coming up with enough cash for the down payment can be challenging, especially if you want to scale your portfolio. That’s where getting a loan based on the rental income your properties produce comes in handy
In this comprehensive guide, we’ll cover everything you need to know about qualifying for loans backed by rental income from investment properties or second homes.
Overview of Using Rental Income for a Mortgage
Rather than just relying on your personal income from a job, lenders can factor in expected rental income when underwriting a loan. This allows real estate investors to qualify for a higher mortgage amount and leverage the equity in existing rentals to purchase additional properties.
Typically, conventional mortgages require rental income to be derived from:
- Existing properties with a track record of generating rental income
- New purchases that have signed leases or estimated market rents
Lenders will also want to see that you have experience managing investment properties if relying heavily on rental income to qualify.
Some key things to keep in mind:
- Rental income can offset the mortgage payment (PITI) of the property being financed or refinanced
- Net rental income can directly be added to your qualifying income, boosting your DTI ability
- On investment properties, if rents exceed the mortgage payment, the surplus also boosts your qualifying income
Overall, loans based on rental income allow real estate investors to qualify for more financing and maximize leverage. But there are specific guidelines depending on the type of property and mortgage program.
Conventional Loan Rules for Rental Income
Conventional mortgages backed by Fannie Mae or Freddie Mac have guidelines for applying rental income from investment properties and second homes.
There are two main ways lenders can calculate rental income:
1. Actual or Estimated Future Rent
This method is used for new purchases without existing rental income documentation. Lenders verify income using:
- Signed leases for actual rents
- Estimates of market rents without signed leases
They take the gross rent and multiply by 75% to get the net rental income.
For example:
- Gross Rent: $1,500/month
- Net Rental Income: $1,500 x 75% = $1,125
This net income amount can then be added to your total qualifying income.
2. Schedule E for Existing Rentals
For properties already generating rents, lenders use Schedule E from your recent tax returns. They’ll calculate the net income as:
- Rents Received
- Minus Total Expenses
- Plus Certain Add-Backs like mortgage interest and depreciation
This net income is averaged over the number of months rented to get the eligible rental income.
The key benefit is that actual past rental income from tax returns is viewed as more stable.
Rules for Primary Residences
For conventional loans on primary residences, here are the rental income sources allowed:
- Single-Unit – Income from an ADU or boarder
- 2-4 Units – Rent from units you won’t occupy
Up to 30% of your total qualifying income can come from rental income in most cases.
So a primary residence with rental income allows you to qualify for more home financing.
Rules for Second Homes
The rules for rental income are more strict on second home mortgages:
- Only allowed for disabled borrowers receiving rental income from a live-in caretaker
- Can’t use income from short-term rentals of a second home to qualify
The big caveat is that you can still refinance current rental properties as second homes with conventional loans. But the income won’t help you qualify for more financing.
Rules for Investment Properties
There is greater flexibility when using rental income for loans on true investment properties.
The standard guidelines apply to mortgages on 1-4 unit residential properties. And you can qualify with rental income from:
- Existing properties already generating rental income
- New purchases with signed leases or estimated market rents
Having at least one year of documented property management experience also allows you to exceed offsetting the mortgage payment. This enables even higher leverage based on rental income.
Other Ways Rental Income Impacts Qualifying
Besides just boosting your total income, rental income affects your mortgage application in a couple of key ways:
DTI Calculation
- Primary Homes – Net rental income is added directly to total income
- Investment Properties – Surplus rental income above PITI offsets mortgage payment
Loan-to-Value (LTV)
- Rental income allows you to qualify for a higher loan amount and lower down payment
- Results in greater leverage on purchases and the ability to pull equity out of rentals
Debt Service Coverage Ratio (DSCR)
- Compares Net Operating Income to Mortgage Payment
- Helps assess if there is adequate rental income to support mortgage
Overall, factoring rental income into your loan qualification can expand your buying power, access to leverage, and ability to grow your real estate portfolio.
Documentation Needed for Using Rental Income
When applying for a mortgage based on rental income, you’ll need to supply documents that verify you have experience managing properties. And paperwork that confirms existing or expected future rental income on properties.
Some typical documentation includes:
- Property Management Experience – Past signed leases, tax returns showing rental income, etc.
- Current Leases – Documentation of actual rent rolls on occupied properties
- Tax Returns – Schedule E showing past rental income and expenses
- Lease Agreements – For new purchases, signed leases from tenants
- Market Rents – Estimates from appraisal or management company
Conventional mortgages generally require a minimum of two years receiving and documenting rental income. And lenders will want to see strong landlord experience for larger loans predominantly based on rent rolls.
8 Types of Loans to Use Rental Income
If you need financing for an investment property or want to leverage rental income for a primary home purchase, here are some of the top mortgage options:
1. Conventional Loans
- Offered by banks, credit unions, mortgage lenders and brokers
- Have clearly defined conventional guidelines for using rental income
- Typically have lower interest rates than government-backed loans
2. FHA Loans
- Require lower down payments and credit scores
- Enable financing based on experience managing investment properties
- Ideal mortgage source for new multifamily purchases and renovations
3. VA Loans
- Offered to eligible military service members, vets, and surviving spouses
- Provide rental income benefits for qualifying for multifamily properties
- Don’t require a down payment which maximizes leverage
4. Portfolio Loans
- Offered by lenders who hold the mortgages on their own books rather than selling to Fannie/Freddie
- Enable custom rental income calculations to help investors qualify
- Feature risk-based pricing, with higher costs for some borrowers
5. Blanket Loans
- Allow investors to purchase or refinance multiple rental properties with one loan
- Require all properties to be cross-collateralized as a group
- Offer release clauses to sell individual properties without needing to refinance the entire loan
6. Private Loans
- Offered by investors pooling capital and acting as lenders
- Feature customized rates/terms structured around deal specifics & borrower experience
- May also take equity positions in properties in exchange for preferable loan terms
7. Seller Financing
- Provided by motivated sellers who act as the bank and hold a mortgage
- Popular for sellers who want to defer taxes through periodic installment sale payments
- Requires similar underwriting standards as traditional mortgage loans
8. Home Equity Lines or Loans
- Enables tapping equity in existing properties for down payments on new purchases
- Sets a borrowing limit based on available equity, typically 75-80%
- Functions as a line of credit with flexible draw amounts (HELOC) or fixed lump-sum loan (home equity)
The key is finding a loan program that aligns with your goals and factoring rental income into qualifying to maximize buying power.
Tips for Increasing Approved Rental Income
If you want to maximize the rental income a lender will consider as part of your loan application, here are some tips:
- Highlight Experience – Emphasize past landlord experience managing properties successfully
- Verify with Documentation – Provide signed leases, Schedule E showing consistent income
- Be Conservative – Don’t inflate rents or projected income unrealistically
- Keep DTI Reasonable – Don’t rely solely on rental income to carry the mortgage
- Have Reserves – Show 6-12 months of mortgage payments in reserves as a buffer
At the end of the day, lenders want to see experienced investors using realistic rental income to support mortgage payments on their property purchases.
The Bottom Line
Loans based on rental income from investment properties provide real estate investors with greater qualifying power. They enable both tapping equity
Reduce Rental Property Loan Costs
The lower your loan costs are, the larger your cash flow could be. Here are some of the best ways to keep your loan costs low when applying for a rental property mortgage:
- Research the best loan terms and conditions by speaking with lenders and mortgage brokers who know the local real estate market.
- Maintain a good personal credit score and use a conservative LTV with a down payment of around 25%.
- Prepare your mortgage application docs ahead of time – items such as W-2s, bank statements, and tax returns – to show the lender you’re a serious real estate investor.
- Generate income statements, net cash flow, and capital expense reports for any existing properties by automatically tracking income and expenses on Stessa.
Options for a Rental Property Loan
It’s much easier and less expensive to find a loan option for a residential rental property like a house or a duplex compared to a large apartment building or commercial property. If you’re shopping around for a rental property loan online, you can get a free rate quote from an experienced mortgage professional on Stessa.
Here are some of the options to look at when you need a loan for buying a rental property or refinancing an existing mortgage:
Conventional or conforming loans are mortgages that most people are familiar with. They are offered by traditional lenders like banks or credit unions, and also by mortgage brokers who work with a variety of lenders and can help you find the best deal.
Interest rates are usually lower than other options provided you have a good credit score, and down payments may be less than 25%. Conforming loans must meet Fannie Mae or Freddie Mac guidelines. While Fannie and Freddie allow up to 10 mortgages by the same borrower, banks often set a lower limit of around four loans total.
Federal Housing Administration (FHA) loans are also offered by traditional lenders and mortgage brokers. Credit score requirements and down payments are usually lower than a conventional loan, and income from an existing rental property can be used to help qualify.
FHA loans are a good option for multifamily property investors looking for a rental property loan for a new purchase, new construction, or renovating an existing property. To help qualify for an FHA multifamily loan, the investor will need to use one unit as a primary residence for at least one year.
Veterans Affairs (VA) multifamily loans are a third option for rental property loans offered by banks, credit unions, and mortgage brokers. Mortgages backed by the U.S. Department of Veterans Affairs are available to active-duty service members, veterans, and eligible spouses.
There are several benefits to using a VA loan for a rental property if you qualify. There is no minimum down payment or minimum credit score, and you may be able to purchase up to seven units. However, one of the units must be your primary residence.
Portfolio loans are mortgages on individual single-family or small multifamily properties by the same lender. Although each property has its own loan, the mortgage brokers and private lenders who offer portfolio loans may offer the borrower a ‘group discount’ for multiple loans.
Loan terms such as interest rate, down payment, credit score, and loan length can be customized to fit the specific needs of the borrower. However, because portfolio loans can be easier to qualify for when an investor has multiple properties, there may also be higher fees and prepayment penalties.
A blanket loan is a good option for real estate investors who want to purchase several rental properties and finance all of them using a single loan or refinance a portfolio of existing rental homes. Mortgage brokers and private lenders are two sources for finding a blanket mortgage loan for any type of income-producing property.
Interest rate, length of loan, down payment, and credit score vary from lender to lender, and loan terms can often be customized to meet the needs of the borrower and lender.
Rental properties in a blanket loan are usually cross-collateralized, which means that each individual property acts as collateral for the other properties. However, you can ask for a release clause that allows you to sell one or more of the group of properties under the blanket loan without having to refinance the remaining properties.
Private loans are offered by experienced real estate investors and business people pool their capital and offer debt financing to rental property owners. Because these private investors know how the real estate business works, they often offer loan terms and fees customized to match the deal potential and the experience of the borrower.
Some private lenders may even take a small equity position in the project and accept future potential profits in exchange for lower fees or interest rates. If the investment performs according to plan, private lenders can also be an excellent source of funding for future rental property investments.
Sellers who own a property free and clear (or with very little mortgage debt) are sometimes willing to act as a lender. By offering owner financing or a seller carryback, property owners who finance a sale to the buyer can generate interest income and earn a regular monthly mortgage payment instead of receiving the sales proceeds in one lump sum.
Seller financing can be a good option for owners who want to spread out capital gains tax payments over the life of the loan as an alternative to conducting a 1031 tax-deferred exchange. However, because the seller is offering the mortgage, borrowers should expect similar underwriting requirements such as credit checks and minimum down payment.
A home equity line of credit (HELOC) and a home equity loan are two options for pulling money out of an existing property to use as a down payment for another rental property loan. This strategy is an example of the waterfall technique where investors use the cash flow and equity build-up from existing rental properties to fund future purchases.
A HELOC acts as a line of credit secured by the equity in an existing property that an investor can tap into at any time, and repay the loan with monthly payments similar to the way a credit card works. On the other hand, a home equity loan is a second mortgage that provides funds to the borrower in one lump sum.
With both a HELOC and a home equity loan lenders generally set a borrowing limit of between 75% – 80% of the property equity. Interest rates and fees may also be higher compared to doing a cash-out refinancing using a conventional loan.
Invest In Real Estate Without Income History (DSCR Loans)
FAQ
Can you get a loan against rental income?
Can anyone get a DSCR loan?
Does rental income count towards loan?
What is the 2% rule for investment property?
What are rental property loans?
A rental property loan is a commercial real estate loan designed to help investors purchase a property that will be rented out to tenants, whether they are residential or commercial tenants.
Can I use rental income to get a mortgage?
Even still, rental income can only be applied up to the amount of the property’s mortgage cost (PITIA) unless you have a year of documental property management experience. Only single-unit properties are eligible for second-home mortgages, and you generally can’t use rental income to qualify for a loan.
How does a rental property loan work?
As a rule of thumb, a lender will apply 75% of the property’s reported rental income to a borrower’s total income. For example, if a borrower earns $100,000 per year and a rental property generates $18,000 per year in gross rental income, a lender will add $13,500 to a borrower’s total income used to qualify for a rental property loan.
Can you use rental income for a conventional loan?
If you’re purchasing or refinancing an income-generating property, you likely plan to use the rent amount to boost your loan application. However, the rules for using rental income from the subject property with a conventional loan can be tricky to decipher.