Investment property loans are a lot like ‘standard’ mortgages, provided you want to buy a home with 1-4 units.
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An investment property is a home that is not your primary residence, and that you buy with the intention to generate rental income or sell for profit.
Most commonly, these include one- to four-unit rental homes or houses that you buy to fix and flip. For the purposes of this article, we are not including commercial investment properties like apartments or office buildings.
It’s important to distinguish between investment properties and second homes because mortgage rules and interest rates are different for each type of property. The biggest difference between the two is that you must occupy a second home for at least part of the year, while you — the owner — don’t live in an investment property.
A second home or vacation home might count as a type of investment property if you intend to rent it out even for short periods. However, lender policies vary over this.
For example, Fannie Mae lets you rent out a second home provided you occupy it yourself for a period each year, retain exclusive control of the home, and don’t rely on your anticipated rental income when you apply. Lenders will also expect a second home to be in a tourist area for a vacation home or a certain distance from your main house if you plan to use it as an occasional residence.
There are three main loan types used to finance investment properties:
Most of those seeking investment property loans will require conventional mortgages. The majority of these are ‘conforming mortgages,’ meaning they conform to lending rules set by Fannie Mae and Freddie Mac. (More information below.)
It’s a condition of all government-backed mortgage loans (FHA, VA, and USDA loans) that the borrower occupies the home as their primary residence. So these are not good sources for investment property loans.
However, there is one exception. You can use a government-backed FHA or VA loan to buy a multifamily dwelling with two, three, or four units. And, provided you live in one of those, you can rent out the other(s).
Many investment property buyers use one of the three mainstream mortgage loan programs listed above. But other options include:
But most buying investment properties turn to mainstream mortgage lenders, including banks. You can find some through our website using the Request a Quote service. You’ll soon find a question that asks whether you want the loan for investment purposes.
If you plan to finance your investment property with a mainstream home loan (likely a conforming loan), the mortgage process will look very similar to any other home purchase. You will:
As when buying a home for yourself, it’s a good idea to get preapproved for a mortgage before you begin house hunting. That way, you’ll know how much home you can afford. And, more importantly, the seller and seller’s real estate agent will know you’re making a serious offer.
Before you settle on a lender, make sure to comparison shop for the very best investment property mortgage rate you can find for investment loans. Keep in mind that investment property mortgage rates are often 0.50 to 0.75% (sometimes 0.875%) higher than those for standard mortgages. And the lower your mortgage rate, the higher your profit margin on the property will be.
As a rule, it gets easier to find an investment property mortgage when the economy’s doing well and more difficult when it’s struggling. That’s because mortgage lenders see investment property loans as riskier than primary home loans. And they may restrict access to moderate their risk level in tough times.
For example, when the Covid-19 pandemic choked the economy, many lenders made qualifying for one of these loans very tough.
So how easily you’re going to find the loan you want will depend on the economic environment when you apply. But, during normal and good times, there are usually plenty of lenders willing to help out.
Mortgage lenders get to set their own requirements. And the guidelines for investment property loans are usually stricter than for a primary residence.
In addition to your finances, mortgage lenders will also evaluate the property you hope to buy.
Lenders will typically lend on any mainstream property: a condo, apartment, manufactured home, single-family house, or multifamily house. But there may be rules about condition, safeness, year-round habitability, accessibility, and so on. An appraiser will establish whether the home is mortgageable.
Mortgage lenders know that investment property loans are riskier than loans for owner-occupied homes. That’s because if a borrower gets into financial trouble, they’ll prioritize paying their main mortgage over their investment property mortgage.
One of the advantages of buying an investment property is that you can typically add your anticipated rental income to your existing income when you apply. That will help you prove you can comfortably afford your new monthly mortgage payments.
tax breaks than owner-occupied ones. So speak to your loan officer and professional tax adviser to discover what those might mean to you.
That depends on your lender’s rules and the type of loan you want. Often 15 percent down is enough for a conventional loan. And for multifamily dwellings where you occupy one unit, you could put down 3.5 percent (FHA loans), 3 percent (conforming loans), or even 0 percent (VA loans), although these are not considered ‘true’ investment properties.
Can you put 3 percent down on an investment property?You cannot put 3 percent down on a ‘true’ investment property. But, as discussed above, a mortgage from Fannie Mae or Freddie Mac has a minimum 3 percent down payment for a multifamily dwelling where you live in one unit. So you can buy with one of these loans and still generate rental income from the additional units in your home.
Can you get a 30-year loan on an investment property?Absolutely! Most borrowers do.
What bank will loan me money for an investment property?Many banks, mortgage lenders, and other lenders are happy to lend on investment properties as long as you meet lending criteria, which are stricter than for your main home. In addition, investment property loans are easier to find when the economy’s doing well. You might have a harder time finding investment property loans during economic downturns, like when the Covid pandemic was at its peak.
Can I use my 401(k) to buy an investment property?That depends on the rules of the program(s) of which you’re a member. But most financial advisers warn against touching your retirement funds for any investment that’s even a bit risky. A better way to fund your investment property purchase might be with equity from your current home, via a cash-out refinance or second mortgage.
Can I live in an investment property?Unlike residential properties, a ‘true’ investment property is one you do not live in. But your home may be considered an investment property if you buy a multifamily property, live in one unit, and rent the other(s) out. Indeed, this can be one of the most affordable ways to buy a rental property and start earning income from it.
How much can I borrow for an investment property?That depends on whether your chosen mortgage has loan limits. In theory, you could borrow millions with a jumbo loan, providing you can afford the monthly payments, have a big down payment, and are highly creditworthy.
Can I use rental income from the investment property to qualify for the loan?Yes, you can typically use the potential rental income from the investment property to qualify for the loan. Lenders may consider a percentage of the property’s rental income, minus any applicable expenses, when evaluating your ability to repay the loan.
What factors do lenders consider when approving an investment property loan?Lenders typically consider factors such as your credit score, debt-to-income ratio, rental income potential, property location, and the down payment you can provide. They want to ensure that you have the financial capability to repay the loan.
Are there any tax benefits associated with investment property loans?Investment properties come with potential tax benefits. You may be eligible to deduct mortgage interest, property taxes, and eligible expenses related to maintaining and managing the property. Consult a tax professional to understand how these benefits apply to your specific situation.
Can I refinance an investment property loan?Yes, you can refinance an investment property loan, just as you would with a primary residence loan. Refinancing may allow you to secure a lower interest rate, change loan terms, or access equity from the property. Discuss your options with lenders to determine if it’s the right choice for you.
Authored By: Peter Warden The Mortgage Reports EditorPeter Warden has been writing for a decade about mortgages, personal finance, credit cards, and insurance. His work has appeared across a wide range of media. He lives in a small town with his partner of 25 years.
Updated By: Aleksandra Kadzielawski The Mortgage Reports EditorAleksandra is the Senior Editor at The Mortgage Reports, where she brings 10 years of experience in mortgage and real estate to help consumers discover the right path to homeownership. Aleksandra received a bachelor’s degree from DePaul University. She is also a licensed real estate agent and a member of the National Association of Realtors (NAR).