If you’re in the market to buy an investment property, the type of loan you pick will directly impact the size of your returns.
Whether seeking a conventional, government-backed, portfolio, private, or hard money loan, you, the borrower, have several options to consider when securing financing from a lender. We’re glad you’re here to exercise your due diligence.
In this article, we’ll cover everything you need to know about investment property loans, including:
Marketing. Applications. Leases. Payments.
According to the IRS, an investment property is any property that is not a primary residence used to earn income and profit through reselling or taking advantage of certain tax benefits.
The government regulates the investment property loan process to protect borrowers, lenders, and the housing market as a whole. Regulations vary depending on the type of loan.
Though similar in many ways to primary residence loans, investment property loans have more stringent requirements. They typically require more money down and demand that the borrower pay a slightly higher interest rate. By nature, investment property loans present a higher risk for lenders and, as a result, are harder to qualify for.
The vast majority of investment property loans fall into one of the five following categories:
Investment property loans are inherently more risky than primary residence loans, which is why the U.S. government has imposed specific regulations through Fannie Mae and Freddie Mac that require different lending practices.
So, why are investment property loans more risky than primary residence loans?
For starters, homeowners typically prioritize their primary residence mortgages over investment property mortgages, making it more likely that they’ll default on the latter.
Next, loan repayment for primary residences relies on the borrower’s income. Alternatively, loan repayment for investment properties relies on rental income, which is less predictable due to potential tenant issues, vacancies, economic downturns, and market fluctuations.
Lastly, primary residences are owner-occupied and typically stay in better condition than rental properties, which affects their overall value and rentability.
As such, this increased risk means lenders typically require better credit scores and more significant down payments. Also, they often charge higher interest rates for investment property loans.
When pursuing financing for an investment property, buyers can consider several different types of loans.
Here are a few of the most popular options:
Conventional mortgages, typically offered by banks, credit unions, and private mortgage companies, account for 70% of all existing home loans.
Lenders typically require a minimum of a 20% down payment of the final purchase price for investment properties. Repayment periods are normally between 15 and 30 years, and interest rates tend to run .5% to 1% higher than primary residence conventional loans.
It’s worth noting that although the U.S. government regulates conventional loans, it does not insure or guarantee them.
Two main options are available to those pursuing an investment property mortgage insured and guaranteed by the U.S. government: FHA loans and VA loans.
FHA loans, insured by the Federal Housing Administration, are designed to make homeownership more accessible to those with lower credit scores and less money for down payments. Those who can’t meet the requirements for conventional loans often pursue FHA loans instead.
Consumers with credit scores between 500 and 579 are typically required to make a down payment of at least 10% towards a property’s purchase price, whereas those with a 580 score or higher will only need to put 3.5% down.
While FHA loans are an attractive option for those who can’t qualify for conventional loans, real estate investors must keep a few things in mind:
VA loans, which are available to veterans, service members, and their spouses, are an attractive option for qualifying homebuyers for multiple reasons:
But, while VA loans are enticing, they have stricter limitations than FHA loans when it comes to using the property to generate rental income:
Though government-backed loans are friendly options for service members, they come with significant built-in restrictions that investment-minded borrowers must consider.
Experienced real estate investors, especially those with multiple properties, might find portfolio loans enticing for purchasing additional properties. In essence, portfolio loans allow borrowers to leverage their assets when securing financing.
Unlike conventional loans, portfolio loans are kept “in-house” by the lender. This means lenders will never sell the loan to Fannie Mae or Freddie Mac, so the loan doesn’t need to adhere to home loan standards set by the Consumer Financial Protection Bureau. This decreased regulation gives the lender and borrower more wiggle room to negotiate the loan terms.
Portfolio loans usually require that borrowers come up with a down payment of 20% or more when purchasing an investment property. And, because of their flexibility, interest rates for these mortgages typically range between .5% and 5% higher than conventional loans.
Portfolio loans are best for borrowers who may not demonstrate significant earned income on paper but instead possess valuable assets (like real estate). They’re also an approachable option for those with less-than-ideal credit scores and higher debt-to-income ratios.
Instead of pursuing loans from traditional lenders (such as banks or mortgage companies), private money borrowers seek money from individuals or groups.
Whether they’re friends, family members, colleagues, or investment groups, private money borrowers often offer more flexible loan terms, faster approval, and more lenient requirements than almost all other traditional loan options.
By nature, private money loans usually have shorter repayment terms than conventional, government-backed, or portfolio loans. They also typically demand larger down payments and require borrowers to pay higher interest rates.
Because private money loans are subject to far less government regulation than traditional loans, borrowers should exercise caution when entering into an agreement with a private lender, even if they trust the lender personally or professionally.
Designed to fund short-term projects like fix-and-flips and home renovations, hard money loans are an enticing financing option for real estate investors with quick turnaround times. These loans are similar to private money loans but tend to be less personal and more transactional.
Hard money loans are risky in nature and typically funded by private lenders. They last between a few months and a year and demand much higher interest rates than traditional loans.
As with private money loans, the requirements for hard money loans are usually less stringent, with rapid turnaround times of as little as a few days.
Experienced real estate investors looking to make a quick profit through a fix-and-flip or a significant home renovation should consider hard money loans. Those looking to purchase a property to function as a long-term investment should look elsewhere.
Though the loan types we discussed differ significantly, all lenders will typically analyze the following essential factors when considering a borrower:
A down payment is an upfront percentage of the purchase price that a real estate investor pays toward a property when securing a loan. The lender will finance the remainder of the purchase price to the buyer, who will repay it over the course of the mortgage.
For instance, a 20% down payment on a $500,000 rental property would be $100,000.
Generally, the higher the down payment a buyer can make, the more favorable the loan terms (such as better interest rates, lower monthly payments, and waived mortgage insurance) they will enjoy.
Lenders will also scrutinize a potential buyer’s cash reserves—the borrower’s amount of liquid assets available after closing—when considering a loan for an investment property.
Lenders view cash reserves—which can cover unexpected expenses like vacancies, major repairs, and property damage—as a safety net for their loans. Borrowers who use all or most of their liquid assets to make a down payment inherently carry a higher liability and often face lower acceptance rates and less favorable loan terms.
Furthermore, many investment property lenders require cash reserve requirements in addition to down payment minimums that borrowers must meet to acquire financing.
For instance, Fannie Mae regulations require that investment property borrowers have six months of cash reserves of principal, interest, taxes, and insurance (PITI) at closing.
In addition to down payments and cash reserves, a borrower’s income, the amount of money they earn annually, is a crucial factor that lenders consider when analyzing a loan application.
Much like cash reserves, income reassures lenders that borrowers can cover mortgage payments in the event of unexpected financial challenges, such as vacancies, major repairs, and property damage.
Lenders typically require buyers to provide recent pay stubs, W-2s, tax returns, and investment account statements as proof of income. Self-employed borrowers usually need to provide more extensive income verification, such as recent profit and loss statements and bank statements.
Once a lender verifies a borrower’s income, they often calculate their debt-to-income ratio (DTI). A DTI is calculated by dividing a borrower’s monthly debt payments (including the proposed mortgage payment) by their monthly income. Conventional lenders typically prefer DTI scores of 43% or lower for investment properties.
A borrower’s credit score indicates their creditworthiness and signals to lenders how likely they are to repay their loan. Different lenders typically have minimum credit score requirements when considering borrowers for mortgages.
For instance, most conventional lenders require borrowers to have a credit score of 620 or higher, while government-backed loans are more lenient. Borrowers with credit scores as low as 500 can be approved for FHA and VA financing.
Generally, the higher a borrower’s credit score, the more likely their loan application will be accepted, and they will enjoy more favorable loan terms.
Investment property loan rates are in constant flux, so we can’t accurately pin down live, up-to-date numbers. Instead, we’ll share available data with you from the time of writing (January 2025) to give you an idea of how different loan interest rates compare to each other:
Conventional Loans
FHA Loans
VA Loans
Portfolio loan interest rates generally fall between .5% and 5% above market.
Private money loan interest rates generally fall between 10% and 13%.
Hard money loan interest rates generally fall between 10% and 18%.
Different loans appeal to different borrowers. Depending on your circumstances, any of the five types of loans discussed in this article could make sense for you.
Though you can go in several directions when pursuing financing for your next investment property, the process is relatively similar across all avenues.
Here are the typical steps borrowers must take when seeking out an investment property loan:
Lenders must first paint a picture of their potential buyer’s finances before loaning them money. Typically, lenders will ask to access a borrower’s:
If you’re considering applying for an investment property loan, start dialing in your financials, gathering essential documents, considering different loan types, zeroing in on a comfortable price range, and setting aside money for a down payment.
Once your finances are in order, it’s time to shop multiple lenders and gather pre-approval offers.
With essential financial documents in hand, reach out to a variety of lenders (banks, credit unions, online lenders, mortgage brokers), discuss your investment property goals, and ask for pre-approval offers from companies that interest you.
A pre-approval offer is a conditional commitment for a specified loan amount based on your current financial picture.
Submit your financial documents to multiple lenders and wait for their replies. Once pre-approval letters start coming back, compare them against each other. Carefully review the loan type, terms, fees, point buydowns, down payment requirements, and more.
After reviewing your pre-approval letters, you’ll better understand your overall budget and potential loan terms. Based on the offers, you can pick a lender (or start negotiating with one or more) to keep the process moving.
Once you have a clear idea of your purchasing power, it’s time to team up with a trusted realtor to find the perfect investment property within your price range.
As you search, consider essential factors like location, market trends, the property’s current condition, immediate financial impact, expected ROI, and more. After thoroughly shopping for investment properties in your budget, zero in on one or two that stand out above all others.
With a pre-approval letter in hand, you and your realtor can now start making offers on your top properties. Though it may take some negotiating, hopefully, you and the seller can eventually reach an agreement to purchase a property that meets your criteria.
Once you’ve agreed to terms with the seller and put a property under contract, you’ll need to secure an investment property loan from one of the lenders that issued you a pre-approval letter.
Connect with your lender of choice and provide any further documentation they may need to move the loan process forward. You’ll need to be attentive and patient, as the loan process can be arduous and time-consuming.
Lenders usually require that a property undergo a thorough appraisal by a licensed professional to determine its fair market value as part of the loan approval process. Appraisals prevent buyers from overpaying and reassure lenders that the property is worth enough to secure the loan.
Lenders will then acquire a written appraisal report to decide the maximum loan amount they’re willing to offer you, the borrower. Once the lender has processed the appraisal report, they will reconnect with you to lock in the final loan terms before it goes to underwriting.
If the property appraises significantly below its agreed-upon purchase price, the lender might not be willing to offer you the full loan amount needed to purchase the property. If this is the case, you might have to renegotiate a lower price with the buyer or come up with a larger down payment.
After the property has been appraised and the lender and borrower have agreed to terms, the loan application will go to a team of underwriters who will review it meticulously. As they do so, they will take a deep dive into the following information:
After scrutinizing this essential information, the underwriters will either approve the loan, give conditional approval pending additional documentation, or deny the loan altogether.
If your loan is approved, the underwriter will issue a “Clear to Close” (CTC). Receiving a CTC means that you, the borrower, have checked off all the boxes, and your loan is officially a go.
From here, the lender will provide you with a Closing Disclosure (CD) at least three days before the agreed-upon closing date. The CD will outline the final terms of the loan, including:
Review the Closing Disclosure in detail to ensure that the final terms match what you previously agreed to. Take your time analyzing the documents, ask for clarification when needed, and address errors if you find any.
Afterward, you’ll conduct a final walkthrough of the property to ensure it remains in its agreed-upon condition. If any issues arise during the walkthrough, address them with the seller before signing the closing papers.
Once the property has passed the walkthrough, you’ll meet with a closing agent to sign the final loan documents. You’ll need to bring a cashier’s check or wire funds to cover your closing costs and down payment.
To finalize the deal, the closing agent will walk you through a large stack of paperwork, explain your agreement in detail, and prompt you to sign and initial where needed.
Once the documents are all signed, the lender will transfer the funds to the seller, officially funding the loan.
You came to learn about investment property loans, and we sincerely hope we’ve clarified your options as you seek financing to grow your portfolio.
We wish you luck on your investment property journey, regardless of how you secure your next loan.
And to streamline your real estate investments, sign up for our free property management software today. It can help automate your portfolio by:
Also, check out the TurboTenant community forum, where you can connect with fellow landlords and discuss real estate investing with your peers.
There aren’t any regulations on how many investment properties Americans are allowed to own. In essence, you can own as many properties as you can afford (or receive financing for).
Ultimately, your financial picture will dictate how many properties you can accumulate, whether you can buy them with cash or finance them with a loan.
Keep in mind that different lenders have different loaning standards. For instance, many lenders follow the government guidelines set forth by Fannie Mae and Freddie Mac, which allow borrowers to finance up to 10 properties at once.
Banks consider many factors when deciding whether to lend you money, including your credit score, income, cash reserves, and DTI.
According to the IRS, an investment property is any property that is not your primary residence and is used to generate income, profit from appreciation, or take advantage of certain tax benefits.
To continue your investment property loan journey, consider visiting the following resources:
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