Purchasing a rental property can be a great way to generate passive income and build long-term wealth However, financing a rental property is different than getting a traditional mortgage for your primary residence. Lenders have stricter requirements when it comes to rental property loans to account for the increased risk
In this comprehensive guide we’ll cover everything you need to know about securing financing for an investment property including
- Types of rental property loans
- Minimum down payment requirements
- Credit score requirements
- Debt-to-income ratio limits
- Required reserves
- Rental income requirements
- Application documentation
- Loan costs and interest rates
Understanding these key loan requirements will help you be prepared to qualify for the best rental property mortgage rates and terms.
Overview of Loan Types
There are several different loan programs available for financing rental properties:
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Conventional loans – Offered by private lenders like banks and credit unions. Require at least 15-25% down and have strict qualifying criteria.
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FHA loans – Government-backed loans that allow 3.5% down for 2-4 unit properties if living in one unit. Credit score of at least 580 required.
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VA loans – Offered to veterans and military members. No down payment required and more flexible credit guidelines. For 1-4 unit properties.
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USDA loans – 100% financing available in certain rural areas. For 1 unit properties. Credit score of 640+ required.
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Portfolio loans – Offered by community banks and credit unions. More flexible qualifying based on overall application.
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Non-QM loans – Alternative option based on rental income only, not your personal income or credit. Require 35%+ down payment.
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Hard money loans – Short-term loans from private investors at higher rates. For fix-and-flip properties.
Each loan type has its own specific requirements, which we’ll break down in more detail next.
Down Payment Requirements
The required down payment is one of the biggest differences between rental property loans and primary residence loans. Here are the typical minimum down payments for each loan type:
- Conventional loans – 20-25%
- FHA loans – 3.5% if living in one unit
- VA loans – 0%
- USDA loans – 0%
- Portfolio loans – 15-20%
- Non-QM loans – 35-40%
- Hard money loans – 25-35%
Gift funds and down payment assistance programs cannot be used for rental properties, except with some government-backed loans like FHA and VA.
Credit Score Requirements
You’ll also need a good credit score to qualify for a rental property loan:
- Conventional loans – Minimum 620 score, but 720+ recommended
- FHA loans – Minimum 580 score
- VA loans – No minimum score, but 620+ recommended
- USDA loans – 640 minimum score
- Portfolio loans – 620+ recommended
- Non-QM loans – No minimum, based on rental income
- Hard money loans – No minimum, based on equity
In general, the higher your score, the better your interest rate and overall loan terms will be. Many lenders prefer scores above 700 for rental properties.
Debt-to-Income Ratio Limits
Your debt-to-income (DTI) ratio also comes into play. This compares your total monthly debt payments to your gross monthly income. Here are typical DTI limits:
- Conventional loans – Up to 50% DTI, 43% preferred
- FHA loans – Up to 57% DTI
- VA loans – 41-50% DTI
- USDA loans – 29-41% DTI
- Portfolio loans – Varies, often higher than conventional
- Non-QM loans – No DTI limit
- Hard money loans – No DTI limit
The lower your DTI ratio, the less risky lenders view the loan. Keeping your DTI below 43% will help you get approved.
Required Reserves
Most lenders require extra cash reserves when financing rental properties. Here are typical reserve requirements:
- Conventional loans – 6-12 months PITI reserves
- FHA loans – 3-6 months PITI reserves
- VA loans – No requirements
- USDA loans – No requirements
- Portfolio loans – 3-6 months PITI reserves
- Non-QM loans – No requirements
- Hard money loans – No requirements
Reserves include your mortgage payment principal, interest, taxes, and insurance (PITI). The more rental properties you own, the higher your required reserves usually are.
Rental Income Requirements
Lenders want to see that the property will generate enough rental income to cover the mortgage payment. Here are some common requirements:
- Conventional loans – 75-85% of appraised rent can count towards qualifying income
- FHA loans – 75% of appraised rent counts as income
- VA loans – Rent counts fully if veteran has renting experience
- USDA loans – Rent counts fully with documented leases
- Portfolio loans – Varies by lender
- Non-QM loans – Only factor is rental income
- Hard money loans – Rent not a factor
Documented leases, rent rolls, and prior rental experience help strengthen your ability to use rental income for qualifying purposes.
Required Documentation
When applying for a rental property loan, be prepared to provide:
- Loan application with personal and income details
- Credit report and scores from all three bureaus
- Tax returns for past 2 years
- W-2s and paystubs covering last 30 days
- Bank statements for past 2-3 months
- List of assets and details on any other properties owned
- Signed leases or rent rolls for property
- Professional management agreement (if applicable)
- Identification and other documentation as required by lender
Having all documents ready will make for a smoother loan application process.
Interest Rates and Costs
Financing costs are higher for rental property loans than primary residence loans. You can expect:
- Interest rates – 0.5 to 1.5% higher than primary mortgage rates
- Origination fees – Up to 2% of loan amount
- Application fees – $100 to $500
- Third-party fees – $1,500+ for appraisal, credit check, etc.
Shopping around and comparing quotes from multiple lenders is key to getting the lowest rates and fees. Your credit score, down payment, and overall financial profile will also impact your offered terms.
The Bottom Line
While rental property loans come with stricter requirements, they can be a great tool for real estate investors. Understanding the typical standards for down payment, credit, income, reserves and documentation is half the battle. With proper preparation, you can secure financing that aligns with your investment goals and sets you up for long-term success.
Conventional Loans (a.k.a Conforming Loans)
- Offered by conventional lenders (banks, credit unions, and mortgage brokers)
- Government-backed, guaranteed by Fannie Mae and Freddie Mac (must meet Government-Sponsored Enterprise guidelines)
- Eligible for the lowest interest rates with a good credit score
- Down payments between 15% and 25%
- It’s possible to get up to 10 mortgages (though for most lenders, there’s a maximum limit of four)
- Tax Returns: 2-3 years of tax returns to verify income and deductions.
- Pay Stubs/W-2s: 30 days of pay stubs and W2 forms from the past 1-2 years.
- Bank Statements: 2-3 months of statements showing your account balance.
- Credit Report: Give lenders permission to check your credit history.
- Proof of Assets: Includes investments and other property.
- Employment Verification: Employer information for the last 2 years.
- Photo ID and Social Security Number: Government-issued identification.
- Access to competitive rates
- Familiar structure for those with experience in residential mortgages
- Stricter credit and down payment requirements
- Limit on the number of mortgages one can hold
- Offered by private lenders or groups that specifically provide loans to real estate investors
- Experienced real estate lenders pool their capital and offer financing to real estate investors
- Loan terms and fees customized to the real estate investment experience of the borrower and the deal potential (e.g., cash flow)
- Often do not require Income Verification to qualify but rather rely on rental property cash flow (rental income)
- Lenders may take equity and get a cut of the profits of the rental property project in exchange for lower fees and interest rates
- If the rental property does well as an investment, private lenders may finance future rental property investments
- Promissory Note: A promise to pay the loan amount.
- Deed of Trust: Establishes a lien on the property as security for the loan.
- Warranty Deed: Transfers property ownership.
- Flexible terms tailored to the investment
- Potential for lower upfront costs
- Higher interest rates reflecting the increased risk
- Potential equity sharing in the property’s profits
- A loan for a multi-family dwelling backed by the Federal Housing Administration
- Offered by mortgage brokers and traditional lenders like banks and credit unions
- Good for new construction and rent-ready purchases or properties that need significant rehabilitation
- Down payment and credit score requirements lower than conventional loans (as low as 3.5% down with a credit score of 580 or higher)
- Existing rental income can be used to help qualify
- Must live in one of the units for at least a year
- Employment Verification: Last 2 years of tax returns, W-2s, and 1099 statements, plus 2 months of pay stubs (3 years of documents for self-employed).
- Financial Assets: Bank statements for all accounts from the past 3 months, including retirement and investment accounts.
- Credit Information: Recent bills and statements for credit accounts, landlord details or 12 months of rent checks, utility bills for credit supplementation, bankruptcy/discharge papers if applicable, and evidence of payments for co-signed loans.
- Personal Documents: Driver’s license, SSN, relevant divorce/alimony/child support documents, Green Card or Work Permit if applicable, and homeownership papers.
- Refinancing/Rental Property: Current loan note and deed, property tax bill, homeowners insurance policy, current mortgage payment coupon, and rental agreements for multi-unit properties.
- Lower entry barriers
- Suitable for properties needing rehabilitation
- Requirement to live in one of the units
- Primarily for multi-unit properties
- Multi-family loan backed by the U.S. Department of Veterans Affairs
- Offered by mortgage brokers and traditional lenders like banks and credit unions
- Available to active duty military service members and veterans (including eligible spouses)
- No minimum down payment or credit score
- Purchase up to seven units
- Borrowers must live in one of the units
- Identification: A driver’s license or other government-issued ID.
- Military Service Documentation: For veterans, a copy of your DD-214; for Reserve or Guard members, points statements.
- Active Duty Documentation: A statement of service if you are an active duty borrower.
- Income Verification: Pay stubs and W-2 forms from the past two years.
- Financial Statements: Recent bank statements.
- Disability Documentation: If applicable, disability award letters.
- Exceptional terms with no down payment
- Broader property options
- Exclusive to military-affiliated borrowers
- Occupancy requirement
- Finance multiple single-family or small multi-family properties from the same lender
- Offered by mortgage brokers or private lenders that may have a “group discount” for multiple loans
- Loan terms can be customized to fit the needs of the borrower (e.g., down payment, credit score, monthly payment, fees, and interest rate)
- Down payments are usually around 20%
- Comes with higher fees and prepayment penalties because it’s easier to qualify for with multiple properties
- May feature a balloon payment where the entire balance is due at the end of the loan
- Credit Score: Allow lenders to check your credit score (scores below 580 can still qualify).
- Proof of Income: Recent W2s, bank statements, or other documents to verify income (including seasonable or variable earnings).
- Debt-to-Income Ratio: Can have higher ratios compared to conventional loans.
- Property Details: Information on properties being financed, including fixer-uppers or multiple properties.
- Loan Terms: Specifics on interest rates, down payments, and repayment schedules.
- Banking Relationship: Evidence of existing relationships with a lending institution.
- Streamlines financing for multiple properties
- Flexible lending requirements compared to conventional loans
- Higher fees and potential for significant balloon payment
- Riskier for less experienced investors
- Finance multiple rental properties under a single loan
- Applicable to any type of income property
- Offered by mortgage brokers and private lenders
- Down payments range from 25% to 60%
- Must have at least six months of cash reserves
- Loan-to-value requirements are typically between 75% and 85%
- Loan terms vary from lender to lender and can be customized to meet borrower’s needs
- Properties within the loan are cross-centralized (each property is collateral for the others)
- Borrowers can ask for a release clause that allows selling one or more of the properties without refinancing the others
- Personal Financials: Credit reports, tax returns, and bank statements.
- Business Financials: Credit reports, tax returns, and bank statements for businesses.
- Property Information: Addresses, details, photographs, purchase dates.
- Property Value and Financing: Purchase price, market value, renovation costs, existing financing, and business plan or proposal.
- Property Finances: Information on renters, vacancy rates, operating expenses, fees, and net operating income.
- Ideal for financing several properties
- Flexibility in property management
- Complex loan structure
- Risk if one property underperforms
How Do Rental Property Loans Work?
Rental property loans, much like conventional commercial real estate loans, involve lenders setting the repayment timeline, monthly payment amount, and interest rate.
If you’ve previously secured a mortgage for your primary residence, you’ll find rental property loans share many similarities. You still have to fill out an application and must be prepared to have your income, assets, and credit score verified.
However, getting a loan for a rental property often has higher entry barriers than standard mortgages. This includes:
- Higher Down Payments: Expect to pay 20% or more.
- Increased Cash Reserves: Lenders may require six months of reserves for each mortgage you hold.
- Debt-to-Income Ratio Limits: Ideally at or below 36%.
- Credit Score Requirements: A score of 640 or higher often secures better loan terms.
Getting a loan for rental property financing will generally cost more than conventional mortgages, with interest rates 0.5% to 0.875% higher, even for those with good to excellent credit.
A notable advantage for landlords is private mortgage insurance doesn’t apply to rental property loans. This insurance is common in residential mortgages with a low down payment, adding around 0.5% to 1% to the mortgage cost.
As a landlord, you’ll need specific insurance for your rental property. Additionally, you can qualify for loans based on rental income from other properties. Lenders often credit a portion of this income, making it easier to qualify alongside your regular income.
Invest In Real Estate Without Income History (DSCR Loans)
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