2023 Best Mortgages for Investors

Investment Property Loans

Investment property loans are like traditional mortgages, given you want to buy a home with multiple units, with the application and approval processes working the same way. However, the rules are a little stricter for an investment property loan than for a mortgage on your primary home and mortgage rates are usually slightly higher than for a standard mortgage.

If you are in the market for an investment property soon, here is what you need to know.

What is an investment property?

An investment property is a home that is not your primary residence, bought with the intention to generate rental income or sell for profit. These commonly include one-to-four-unit rental homes or properties that you buy to fix and flip. 

You should note the distinction between investment properties and second homes is that you must occupy a second home for at least part of the year as an owner, while you do not live in an investment property.

Loan options for investment properties

There are three main loan types used to finance investment properties:

• Conforming loans: Use of conventional loan programs is the most common option
• Jumbo loans: Used when the loan amount exceeds conforming loan limits
• Government-backed loans: Used only if you occupy one unit as the owner and rent out the others (FHA, VA, and USDA-RD loans are often not considered true investment properties)

True investment properties are those an owner does not live in. But your home may be considered an investment property if you buy a multifamily property and live in one unit while renting the other(s) out. This is one of the most affordable ways to buy a rental property to start earning income from it.

Alternative finance options

Most investment property borrowers use one of the three mainstream mortgage programs above, but other options include:

• Home equity: A Home Equity Line Of Credit (HELOC) or Home Equity Loan on your current home 
• Private loans: Investors will sometimes fund the purchase of rental property
• Seller financing: A seller who owns a home outright may trade the property for a lump sum
• “Hard money loans”: Short-term loans can work well for house fixers and flippers

Investment property mortgage requirements

Mortgage lenders set their own requirements with the guidelines for investment property loans usually stricter than for a primary residence.

While these guidelines vary by lender, you can generally expect the following requirements for an investment property mortgage.

• Minimum down payment: 15-20% of property value, though better rates are often with 25% down
• Minimum credit score: 680 with a 15% down payment or 620 with 25% down
• Maximum DTI: Your debt-to-income ratio, minus your non-housing debts, should typically, be less than 28% of your gross monthly income. And including your total debts with housing costs should not exceed 36%
• Cash reserves: Lenders want you to have cash reserves (or easily liquefied assets) that are sufficient for you to maintain your loan for six months without rental income
• Loan limits: Government-backed mortgages and conforming mortgages have limits on the amount you can borrow which vary according to local property prices
• Documentation: Lenders typically request two years of tax returns, two years of W-2s, and two months of bank statements at a minimum which vary upon loan program

Investment property types

Lenders generally lend on any mainstream property type, including: 

• Condo
• Apartment
• Manufactured home 
• Single-family house
• Multifamily house

Investment property loan rates

Since investment property loans are riskier than loans for owner-occupied homes, lenders charge higher interest rates than for ordinary mortgages in addition to higher requirements to qualifying.

Investment property mortgage rates are often 0.50-0.75% (sometimes 0.875%) higher than those for standard mortgages. Rates vary by lender and your down payment, credit score, cash reserves, and DTI factored into your loan approval. The best interest rates on investment properties typically require a down payment of at least 25%.

Advantages in mortgage rules for investment properties

An advantage of buying an investment property is that you can usually include the anticipated rental income to your existing income when you apply for a mortgage loan, which helps prove you can afford your new mortgage payments. Though not all lenders will count all that extra income, nor rely on your word alone for how much it will be.

It is typically allowed to count up to 75% of the future rental income toward your qualifying income. Lenders will require either a current lease agreement or a rental schedule, using the appraiser’s view of your likely rental income based on local comparisons with similar rental properties.

Also come tax season, investment properties usually offer more generous tax breaks than owner-occupied ones. 

Review My Mortgage can help you identify the best investment property loan options available to you with a simplified and streamlined process. Contact us today! 

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