Investment Property Mortgage: Requirements, Rates and How to Qualify

Investment property mortgages require a 15-25% down payment, a minimum credit score of 620 (700+ preferred), 6 months of mortgage reserves and interest rates 0.5-0.75% higher than primary residence loans. Rental income can help you qualify, but lenders typically count only 75% of expected rent. Most investors can finance up to 10 properties through conventional loans.

Investment Property Loan Requirements

Down Payment

Property Type	Minimum Down	Preferred
Single-family investment	15%	20-25%
2-4 unit investment	25%	25%+
Second/vacation home	10%	20%

Why higher down payments?

• Investors default more often than homeowners
• No emotional attachment to property
• Lender takes more risk

Credit Score

Credit Score	Availability
740+	Best rates, all lenders
700-739	Good rates, most lenders
680-699	Higher rates, many lenders
660-679	Limited options, higher rates
620-659	Very limited, highest rates
Below 620	Unlikely to qualify

Reserves

Lenders require 6 months of mortgage payments in reserves for investment properties.

What counts:

• Checking and savings
• Investment accounts (70% of value)
• Retirement accounts (60-70% of value)
• Cash value life insurance

What doesn’t count:

• Equity in other properties
• Expected rental income
• Stocks with restrictions

Example:

• Investment property payment: $2,200
• Required reserves: $2,200 × 6 = $13,200
• Must have $13,200 in liquid assets after closing

Debt-to-Income Ratio

Same limits as primary residence:

• Front-end: No strict limit typically
• Back-end: 43-45%

But: You may need to qualify at higher rate for ARMs (to show you can handle increases).

Interest Rates for Investment Properties

Rate Premiums

Investment property rates run higher than primary residence:

Scenario	Rate Premium
Primary residence	Baseline
Second home	+0.25-0.375%
Investment (1 unit)	+0.5-0.625%
Investment (2-4 units)	+0.75-1.0%

Example rates (well-qualified borrower):

• Primary residence: 6.50%
• Investment property: 7.00-7.125%

Why Higher Rates?

More risk for lenders:

• Higher default rates on investment properties
• Investors may walk away if property underperforms
• Can’t sell to Fannie/Freddie as easily

Getting Better Rates

• Higher down payment (25%+ may get better pricing)
• Excellent credit (740+)
• Strong reserves
• Shop multiple lenders

Using Rental Income to Qualify

How Lenders Count Rental Income

Lenders don’t count 100% of expected rent:

Situation	How Rent Is Counted
Existing rental (2-year history)	75% of documented rent
New purchase with lease	75% of lease amount
New purchase, no lease	75% of appraiser’s rent estimate

Why 75%? Accounts for vacancies, repairs and management.

Rental Income Calculation

Property purchase price: $300,000 Expected rent: $2,200/month Counted rental income: $2,200 × 75% = $1,650

Mortgage payment (PITI): $2,100 Net for DTI: -$450 (this adds to your DTI)

If rent exceeds payment significantly, it can help your DTI.

Documentation Needed

For existing rentals:

• 2 years of tax returns showing rental income
• Current lease agreements
• Rent rolls (if multiple units)

For new purchases:

• Signed lease (if available)
• Appraiser’s rent schedule (Form 1007)

Loan Options for Investment Properties

Conventional Loans

Best for: Investors with good credit and reserves

Features:

• 15-25% down
• Rates 0.5-0.75% above primary residence
• Can finance up to 10 properties
• 30-year and 15-year terms available

Portfolio Loans

Best for: Investors beyond 10-property limit or unique situations

Features:

• Held by lender (not sold to Fannie/Freddie)
• More flexible guidelines
• Higher rates typically
• May allow LLC ownership

DSCR Loans (Debt Service Coverage Ratio)

Best for: Investors who don’t qualify traditionally

Features:

• Qualification based on property cash flow, not personal income
• DSCR of 1.0-1.25 typically required
• No tax returns or employment verification
• Higher rates (1-2% above conventional)
• 20-25% down required

DSCR calculation: DSCR = Monthly rent ÷ Monthly payment (PITI)

If rent is $2,500 and payment is $2,000: DSCR = 2,500 ÷ 2,000 = 1.25 ✓

Hard Money/Bridge Loans

Best for: Fix-and-flip, quick purchases, distressed properties

Features:

• Fast funding (days, not weeks)
• Based on property value, not borrower income
• Very high rates (10-15%+)
• Short terms (6-24 months)
• High points and fees

Commercial Loans (5+ Units)

Best for: Apartment buildings, commercial properties

Features:

• 5+ unit properties require commercial financing
• Different underwriting (based on property income)
• Shorter terms (5-10 year balloons common)
• Higher rates than residential

Maximum Number of Financed Properties

Conventional Limits

Properties Financed	Availability
1-4	Standard financing available
5-6	More requirements, available
7-10	Tighter requirements, available
11+	Portfolio or commercial loans only

Requirements for 5-10 Financed Properties

• 25% down on investment purchases
• 720+ credit score
• 6 months reserves per property
• No late mortgage payments (past 12 months)
• No bankruptcy or foreclosure (past 7 years)

Beyond 10 Properties

Options:

• Portfolio lenders
• DSCR loans
• Commercial loans
• Private/hard money
• Seller financing

Investment Property Strategies

Buy and Hold

Goal: Long-term rental income and appreciation

Financing approach:

• 30-year fixed for stability
• Maximize leverage (lower down payment)
• Focus on cash flow

Fix and Flip

Goal: Buy, renovate, sell for profit

Financing approach:

• Hard money or bridge loans
• Short-term financing
• Factor renovation costs into loan

BRRRR Strategy

Buy, Rehab, Rent, Refinance, Repeat

Financing approach:

1. Buy with hard money or cash
2. Renovate
3. Rent to tenant
4. Refinance to conventional (cash out equity)
5. Use cash for next property

House Hacking

Goal: Live in one unit, rent others

Financing approach:

• Can use primary residence financing
• FHA allows 3.5% down on 2-4 units
• VA allows 0% down on 2-4 units
• Lower rates than pure investment

House Hacking: The Beginner Strategy

How It Works

Buy a 2-4 unit property:

• Live in one unit
• Rent the others
• Rental income covers mortgage

Financing Advantages

Loan Type	Down Payment	Rate
Conventional (primary)	5%	Standard
FHA	3.5%	Standard FHA
VA	0%	VA rates

Compare to investment property: 15-25% down at higher rates

Example

4-plex purchase price: $450,000 FHA down payment (3.5%): $15,750 Monthly mortgage (PITI + MIP): $3,200

Your unit value: $1,100/month Three rentals: $1,100 × 3 = $3,300/month

Cash flow: +$100/month (you live free AND profit)

Second Home vs Investment Property

Key Differences

Factor	Second Home	Investment Property
Occupancy	Some personal use	Rented or vacant
Location	Usually 50+ miles from primary	Any location
Down payment	10%	15-25%
Rate premium	+0.25-0.375%	+0.5-0.75%
Rental allowed	Limited	Unlimited

Second Home Requirements

• Must be suitable for year-round use
• Must be reasonable distance from primary (typically 50+ miles)
• Must have some personal use annually
• Cannot be rented full-time
• One borrower must use it personally

Why It Matters

Misrepresenting an investment property as a second home is mortgage fraud. Lenders verify occupancy intent.

Tax Considerations

Deductible Expenses

Investment property owners can deduct:

• Mortgage interest
• Property taxes
• Insurance
• Repairs and maintenance
• Property management fees
• Depreciation
• Travel for property management

Depreciation

Residential rental property is depreciated over 27.5 years:

Example:

• Purchase price: $300,000
• Land value: $60,000
• Building value: $240,000
• Annual depreciation: $240,000 ÷ 27.5 = $8,727

This reduces taxable income even if you’re cash-flow positive.

1031 Exchange

Defer capital gains by exchanging one investment property for another:

• Must be “like-kind” (real estate for real estate)
• Strict timelines (45 days to identify, 180 days to close)
• Cannot receive cash (“boot”) without tax consequence

Consult a tax professional for investment property tax planning.

Frequently Asked Questions

Can I use FHA for investment property?

No. FHA is for primary residences only. However, you can use FHA for a 2-4 unit property if you live in one unit (house hacking).

How many investment properties can I have?

Most lenders allow 10 financed properties through conventional loans. Beyond 10, you’ll need portfolio lenders, DSCR loans or commercial financing.

Do I need a larger down payment for rental property?

Yes. Investment properties typically require 15-25% down, compared to 3-5% for primary residences.

Can I use rental income to qualify for the mortgage?

Yes, but lenders typically count only 75% of rental income. For existing rentals, you need 2 years of tax return history. For new purchases, an appraiser estimates market rent.

Are investment property rates higher?

Yes. Expect rates 0.5-0.75% higher than primary residence rates. Some lenders charge even more for 2-4 unit properties.

Can I buy investment property in an LLC?

Not with conventional financing. Conventional loans require personal ownership. Portfolio lenders and DSCR lenders may allow LLC ownership.