For a traditional rental property (you don't live in it), you'll typically need a conventional investment loan with 15-25% down, a credit score of 620-720+, and enough reserves (6-12 months of payments). DSCR loans are an alternative that qualify based on rental income. Both have higher rates than primary residence loans because investment properties carry more risk.
Conventional Investment Loans (Requirements, Rates, Down Payment)
Conventional investment loans are the standard choice for financing rental properties. They follow Fannie Mae and Freddie Mac guidelines and require you to qualify based on your personal financial profile.
- Down payment: 15% minimum for single-family investment properties. 20-25% for 2-4 unit properties.
- Credit score: Minimum 620, but rates improve significantly above 700.
- Rates: Typically 0.5-1.5% higher than owner-occupied rates.
- Debt-to-income: Maximum 43-50% DTI including the new mortgage.
DSCR Loans (Alternative Qualification)
DSCR (Debt Service Coverage Ratio) loans are a popular alternative that qualify based on the property's rental income rather than your personal income. This makes them ideal for self-employed investors or those who already own multiple properties.
- Qualification: Based on the ratio of rental income to debt payments. Most lenders want 1.0 or higher.
- No income docs: No tax returns, W-2s, or pay stubs needed.
- Down payment: 20-25% minimum.
- Rates: Higher than conventional, typically 1-2% more.
VA / FHA Options (Only if Owner-Occupied)
VA and FHA loans can be used for investment properties, but only if you live in the property. VA allows up to 4 units with zero down, and FHA allows up to 4 units with 3.5% down. Both require you to owner-occupy for at least 12 months. These are great for house hacking but cannot be used for non-owner-occupied rentals.
Reserves Requirements
Lenders require cash reserves for investment property loans because they are riskier than primary residence loans. Reserves are liquid assets you keep after closing that cover the mortgage if the property is vacant.
- Typical requirement: 2-6 months of PITI (principal, interest, taxes, insurance) in liquid assets.
- Multi-property owners: Some lenders require reserves for all investment properties owned, not just the one being purchased.
- What counts: Checking, savings, money market, stocks, bonds, and retirement accounts (at reduced value).
How Rental Income Affects Qualification
Lenders treat rental income differently depending on the loan type and your experience. For conventional loans, you can use 75% of the projected rental income (the 25% vacancy factor) to offset the new mortgage payment. If you have a history of owning rental properties, you may be able to use your Schedule E tax returns to show actual rental income.
Investment Property Rate Premium
Expect to pay a rate premium on investment property loans. This is because investment properties have a higher default rate than owner-occupied homes. The premium is typically 0.5-1.5% above owner-occupied rates, plus additional costs for the higher down payment requirement.