If you’re interested in becoming a landlord or buying a home and flipping it for a profit, an investment property loan could help you achieve your goals. But if you’re investing in real estate for the first time, you might be worried that this type of financing is hard to get. 

It’s true that you may need to jump through more hoops to access loans for real estate investment. But if you understand how the process works and what lenders are looking for, getting an investment property loan might be well within your reach. 

What Qualifies as an Investment Property? 

An investment property is a piece of real estate you buy in order to earn a profit. If you buy a property with the intention of renting it or reselling it to someone else rather than living in it yourself, it’s most likely an investment property. 

However, if you want to purchase a large multi-family investment property, a traditional investment property loan might not work for you. Instead, you may need to look into a commercial real estate loan. 

For example, an apartment complex might fall under the commercial real estate property designation. And if you’re buying something outside of the residential property spectrum, like an office building, it wouldn’t be considered a traditional investment property either.

The same may be true if you want to build an investment property on undeveloped land. A construction loan might be a better fit for you, though a commercial real estate loan program may work in this situation too. 

Requirements for an Investment Property Loan

With any type of loan, different lenders will have different qualification requirements. Below are some of the most common factors that a mortgage lender may consider when you apply for investment property financing. 

Of course, you should check with your lender to discover the specific criteria you need to satisfy in each category. 

Employment History

For a traditional, owner-occupied mortgage, you may need to show at least two years of stable employment history to qualify. But with investment loans, the lender might want to see three, or even four, years’ worth of employment history depending on the type of job you hold. 

Self-employed applicants and those who earn money based on commissioned sales may have to comply with stricter requirements here. Yet that’s also the case for many personal mortgage loans as well. 

Debt-to-Income Ratio

Your existing debts and how they relate to your income are important details that a lender will consider when you apply for an investment loan. Debt-to-income (DTI) ratio requirements can fluctuate depending on the type of loan you choose, but a lower number is always better. 

With conventional loans, a DTI ratio below 50% is generally required. Yet different lenders may have different maximum DTI ratios that they are willing to tolerate. In some cases, you might not be eligible for a loan unless your DTI ratio is 45% or lower. 

Credit Score and Credit History

With any type of financing, investment property loans included, good credit can work to your advantage. When you have a good credit score, it makes it easier to qualify for loans and get competitive offers from multiple lenders. 

Most lenders will have a minimum credit score cutoff point. If your score falls below this level, you may need to work to improve your credit before you can qualify for an investment loan. 

Minimum credit score requirements often hover around the 620 FICO® Score level. In some cases, however, you might need a 680 FICO Score or higher to qualify. 

In addition to your three credit scores, the lender may review your credit reports from Equifax, TransUnion, and Experian. If there are any problems on your credit reports, you might have to provide an explanation letter. And with serious issues, you might be ineligible for financing. 

Potential credit history red flags that could make it difficult to qualify for a loan include: 

• Recent late payment history
• Foreclosures (or foreclosure-like events)
• Repossessions
• Bankruptcy
• Collection accounts 
• Charged-off accounts 

Lack of credit history can also be a problem when you apply for investment property loans. But you can fix this potential issue by establishing credit and responsibly managing your new accounts.

A Credit Strong Credit Builder account could help you build credit. You can open an account with no upfront security deposit and there’s no credit check requirement either. 

If you’re thinking about using a business loan to purchase an investment property, the Credit Strong Business Credit Builder account has the potential to help you establish a positive business credit history as well.

Down Payment (20–25%)

The size of your down payment may vary based on your credit score and other factors. It’s common for a down payment requirement to hover between 20–25% with investment property loans. But there can also be exceptions to this rule, such as: 

• 10% Down Payment: You might qualify for a low 10% down payment (and sometimes less) with the HomeReady and Home Possible mortgage programs. However, with these Fannie Mae and Freddie Mac programs, you may need to be an owner-occupant and live in the financed property for at least one year. Income restrictions also apply and earning too little or too much might disqualify you. 
• 15% Down Payment: If you’re buying a single-family investment property and have a good credit score, you might be able to get by with a down payment of 15% or less.
• 25% Down Payment: Saving up 25% to put down on an investment property loan may be a more realistic number to shoot for if your credit score is lower or if you are buying a two-, three-, or four-unit property that you don’t plan to occupy yourself. 

Cash Reserves or Savings in the Bank

Reserves are a form of cash or cash-like assets that you can access if you need help covering the cost of your loan payments. With any mortgage, the lender will want to see that you have enough cash in the bank to draw from in the event of an emergency. 

With a rental property loan, your lender may want you to show that you have more reserves than would typically be required for a primary mortgage. Higher reserves can increase your loan approval odds. 

Differences Between Investment Property Loans and Conventional Home Loans

The process of borrowing money to purchase real estate is similar whether you’re buying a home to live in yourself or as an investment. 

Yet if you only have experience getting a mortgage for an owner-occupied property, you might be in for a few surprises when you apply for your first investment property loan. 

Lower Maximum LTVs

The loan-to-value ratio, or LTV, is a formula lenders use to calculate the maximum amount of money they are willing to loan you on a property purchase. LTV compares the value of a property (based on an appraisal) with the size of your mortgage. 

If you take out a $180,000 loan to buy a property that appraises for $200,000, your LTV is 90%. In other words, you’re borrowing 90% of the value of the home.

Lenders have upper limits when it comes to LTV to make sure they don’t get stuck without a way to recuperate their investment if you default on your loan. If you were to borrow more than a home is worth, or even 100% of the value, that puts the lender in a risky position. 

Limits can vary between different lenders and different loan types. Here are some of the LTV ratio limits you might encounter with a conventional home loan (for an owner-occupied, single-family property) versus an investment property loan. 

LTV Ratio Limits for Conventional Home Loans and Investment Properties

	Primary Residence	Investment Property
1-Unit Property	95% LTV	85% LTV
2-Unit Property	85% LTV (Owner-Occupied)	75% LTV
3 and 4-Unit Properties	80% LTV (Owner-Occupied)	75% LTV

Source: Freddie Mac

To keep your LTV ratio within an acceptable range, you may have to provide a bigger down payment on an investment property loan. It’s also important to understand that your LTV ratio can impact your interest rate as well. 

Higher Interest Rates

Interest rates can change on a day-to-day basis in the mortgage market. As a rule of thumb, you should expect to pay at least 0.50% to 0.875% more when you’re borrowing money for an investment property than you would pay if you were taking out a primary mortgage. 

Your credit score also has an impact on the interest rate you’ll pay with conventional loans and investment property loans. If you can work to get your credit in the best shape possible before you seek financing, you could save a lot of money. 

For an idea of how much your credit score might impact your mortgage rate, check out the free Loan Savings Calculator from myFICO. You can add on an additional 0.50% to 0.875% to your estimates to see the types of rates you might qualify for on an investment property loan. 

Keep in mind that the rate and mortgage payment estimate you see online isn’t set in stone. Other factors outside of your credit score can also drive the final rate a lender is willing to offer you up or down according to the loan’s overall risk. 

Higher Cash Reserve Requirements

Lenders often want to see at least two months’ worth of cash reserves when you purchase a primary residence. 

But you may need to show at least six months of cash reserves in the bank (or in accessible investment accounts) when you apply for a loan to buy an investment property. Under certain circumstances, you might need more.

Creditworthiness, loan program type, and other factors can all influence this loan requirement. Remember, a lender will only approve you for a loan if it feels the risk level makes sense. Higher cash reserves is one way you might make a lender feel better about their investment. 

More Documentation

Documentation and mortgages go hand in hand. Just ask anyone who has ever applied for a home loan. But when you’re borrowing money from a lender to purchase an investment property, expect that you’ll have to provide the standard pile of documents and then some. 

Here are some of the types of documentation a loan officer might request with an investment loan application:

• Bank statements for the past two months
• Investment account statements (IRAs, 401(k)s, CDs, brokerage accounts, etc.)
• W-2s for the past two years
• Tax returns for the past two years
• Proof of rental income (if applicable)
• Pay stubs for the past two months
• Proof of other income sources (alimony, child support, social security, etc.)
• Mortgage statements on other properties you own
• Homeowners association statements on other properties you own
• Proof of homeowners insurance and statements on other properties you own
• Property tax bills on other properties you own

If you’re self-employed or applying for a business loan, be prepared to provide certain documents for your business as well (i.e., business tax returns, bank statements, etc.). 

The mortgage loan officer might also request a balance sheet statement, cash flow statement, profit, loss statement, and more. 

Types of Loans for Investment Property

There’s no one-size-fits-all approach to rental property loans. If you plan to dive into the real estate investment market, it’s wise to know the different available financing options. 

Conventional Loans

A conventional loan can be a good fit for certain types of investment properties. With owner-occupied properties, in particular, you may be able to qualify for a conventional loan for as little as 5% to 10% down. 

If you plan to live in a home first and turn it into an investment property later, a conventional loan could save you even more money. But if you don’t want to make the property your primary residence, expect to pay higher interest rates than you might be eligible for otherwise. 

Hard Money Loans

Despite the name, a hard money loan is often easier to qualify for than an investment property mortgage from a traditional lender. With this type of loan, the value of the asset (aka the property) you want to purchase is the biggest factor that determines whether you can qualify. 

You might be able to access funding much faster with a hard money loan — sometimes within a matter of days. On a negative note, this type of financing is often a short-term and expensive solution for a real estate investor. 

Investment property mortgage rates also tend to be higher and repayment terms may be accelerated. And with hard money lenders, you might face additional fees, prepayment penalties, and balloon payments that all put you in a riskier position as a borrower. 

Private Money Loans

Private money loans are similar to hard money loans in several ways. Because the financing doesn’t come from a traditional lender, qualification criteria tend to be more flexible. Even if you have credit or DTI ratio challenges, a private money lender might still work with you. 

A private money lender typically isn’t as organized as a hard money lender and might not be licensed as a lender at all. 

A friend or family member offering you financing could be considered a private money loan. Or you might secure a private money loan from a friend of a friend who wants to invest in a real estate deal with you. 

Because there’s flexibility with private money loans, the interest rate, fees, and even loan requirements can be wildly different from one loan to the next. It’s important to research the unique risks involved with this nontraditional type of funding before you proceed.

Home Equity Loans

A home equity loan lets you borrow against the equity you hold in another property. Because you use a property you already own as collateral to access money, this type of loan is also called a second mortgage. 

You can take out a home equity loan to pay down debt, make repairs, etc. If the lender doesn’t restrict you from doing so, you may also be able to use this type of loan to purchase an investment property. 

Of course, there are benefits and drawbacks to using home equity loans for investment property purchases. One of the biggest downsides is that you’re putting a property you already own at risk in the event of a default. 

However, if you have good credit, interest rates tend to be low with home equity loans. And depending on your situation, this type of financing might be easier to qualify for compared to traditional investment property mortgages. 

Is It Hard to Finance an Investment Property? 

It can be a challenge to qualify for an investment property loan — especially one with attractive interest rates and loan terms. Yet there are moves you can make that might enhance your approval odds and put you in a position to secure a better deal on financing: 

• Improve your credit score. Working to earn a better credit score can help you with any type of financing. If you’re seeking a business loan for an investment property, be sure to pay attention to your business credit scores too. 
• Save a bigger down payment. Putting more money down can reduce your LTV ratio, lower the lender’s risk, and make you more likely to qualify for financing. 
• Pay down your debt. Lowering your DTI ratio can make you a more attractive borrower. Plus, paying down a credit card balance or another type of debt might save you money on interest or even boost your credit score. 

Do All Investment Property Loans Require 20% Down?

A 20% down payment is common in the investment property world. But it’s not the only option available. 

With good credit and other factors working in your favor, you might qualify for an investment loan with as little as 15% down. And if you’re willing to be an owner-occupant in a multi-family home, you might find a lender that will work with an even smaller down payment size. 

Bottom Line

Investing in real estate has the potential to pay off in big ways. But you have to be wise about every aspect of your investment or you could lose money rather than make a profit. 

Choosing the right investment property loan is an important decision. Take the time to research and compare different loan options so you can find the best option available for your situation. 

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