Conventional Loans for Investment Properties

A conventional loan for an investment property lets a buyer purchase a rental home without government-backed mortgage insurance rules attached to FHA or VA loans. Investors use conventional loans to buy single-family rentals, duplexes, triplexes, and fourplexes. This guide explains how a conventional loan for an investment property works, what lenders require, and how the terms compare to a loan for a primary residence.

What Is a Conventional Loan for an Investment Property

A conventional loan for an investment property is a mortgage that is not insured by the FHA, VA, or USDA. Fannie Mae and Freddie Mac set the guidelines most lenders follow. Because the home will not be the borrower's primary residence, the lender treats the loan as higher risk. This higher risk leads to stricter requirements than a loan for a primary home.

Down Payment Requirements

Lenders usually require a larger down payment for an investment property loan than for a primary residence loan. A single-family rental often requires at least 15 percent down. A two- to four-unit property often requires at least 25 percent down. A larger down payment can lower the interest rate and reduce the lender's risk.

Credit Score Requirements

A conventional loan for an investment property typically requires a credit score of at least 620. Many lenders prefer a score of 680 or higher for the best pricing. A higher credit score can also reduce the down payment required on some loan programs.

Debt-to-Income Ratio

Lenders review the borrower's debt-to-income ratio, or DTI, to confirm the borrower can afford the new mortgage along with existing debts. Most lenders cap DTI at 45 percent for an investment property loan, though some allow up to 50 percent with strong compensating factors such as high reserves or a large down payment.

Interest Rates for Investment Properties

Interest rates on a conventional loan for an investment property run higher than rates on a primary residence loan. Lenders add a rate adjustment because a rental property carries more risk than a home the borrower lives in. Borrowers with strong credit and a larger down payment can reduce this rate increase.

Cash Reserve Requirements

Lenders often require cash reserves for an investment property loan. Reserves are funds left over after closing that could cover several months of mortgage payments. A common requirement is two to six months of reserves, though the amount can rise if the borrower owns multiple financed properties.

Using Rental Income to Qualify

A lender may allow the borrower to count a portion of the property's expected rental income toward qualifying income. An appraiser completes a rent schedule to estimate fair market rent. Lenders typically count 75 percent of that rent to account for vacancy and maintenance costs.

Limits on the Number of Financed Properties

Fannie Mae guidelines allow a borrower to hold up to ten financed properties, including the primary residence. Loan requirements become stricter as the number of financed properties increases. Borrowers with five or more financed properties face higher reserve requirements and stricter credit standards.

Conventional Loans Compared to FHA and VA Loans

FHA and VA loans are built for primary residences and generally cannot fund a pure investment property purchase. A conventional loan is the standard financing option for a rental property purchase because it does not require owner occupancy. Investors who want a multi-unit property to live in one unit and rent the others may still qualify for FHA or VA financing, but a true investment property purchase relies on a conventional loan.

Closing Costs on an Investment Property Loan

Closing costs on a conventional loan for an investment property include the appraisal, title insurance, lender fees, and prepaid items such as property taxes and insurance. Investors should also budget for the rent schedule addendum on the appraisal, which adds a modest fee compared to a standard primary residence appraisal.

Steps to Qualify for a Conventional Investment Property Loan

• Check credit score and pay down existing debt before applying.
• Save for a down payment of at least 15 to 25 percent.
• Gather two years of tax returns and proof of reserves.
• Get preapproved before making an offer on a rental property.
• Provide a lease agreement or rent schedule if the property already has a tenant.

Pros and Cons of Conventional Financing for Rental Properties

Pros: No owner-occupancy requirement, no upfront government mortgage insurance fee, and the ability to finance up to ten properties.

Cons: Larger down payment requirement, higher interest rate than a primary residence loan, and stricter reserve requirements.

Frequently Asked Questions

Can I get a conventional loan for an investment property with 10 percent down?

Most lenders require at least 15 percent down for a single-family investment property. A 10 percent down payment is generally reserved for a primary residence purchase.

Do I need landlord experience to qualify for an investment property loan?

No. First-time investors can qualify for a conventional loan for an investment property. Lenders may limit how much rental income can count toward qualifying if the borrower has no landlord history.

Can I use a conventional loan to buy a fourplex as an investment?

Yes. Conventional financing covers one- to four-unit properties. A fourplex purchased purely as an investment typically requires at least 25 percent down.

Is mortgage insurance required on an investment property loan?

Private mortgage insurance is generally not available on investment property loans, which is one reason lenders require a larger down payment instead.

How many rental properties can I finance with conventional loans?

Fannie Mae guidelines allow up to ten financed properties per borrower, including the primary home, though stricter requirements apply once a borrower passes four financed properties.