Investment Property Loans for Real Estate Investors

What Is an Investment Property Loan?

Investment property loans are mortgages used to purchase or refinance real estate that is not occupied as your primary residence and is generally held to generate rental income, appreciation, or both.

Financing an investment property differs from financing a primary residence because lenders evaluate the additional risks associated with non-owner-occupied real estate. The loan options available can depend on the property, borrower qualifications, rental income, down payment or equity, credit profile, reserves, and investment strategy.

Investment Property Financing Options

Real estate investors may have several financing options. The right program depends on how you qualify, the property being financed, and your investment goals.

Conventional Investment Property Loans

Conventional mortgages can be used to finance eligible investment properties. Qualification generally considers the borrower’s income, debts, assets, credit profile, down payment or equity, and applicable rental income.

Conventional financing can be a strong option for investors who meet traditional underwriting requirements and want long-term fixed-rate or other eligible conventional mortgage options.

DSCR Loans

DSCR loans provide an alternative for real estate investors by qualifying primarily based on the investment property’s rental income rather than traditional personal income documentation. DSCR stands for Debt Service Coverage Ratio and measures qualifying rental income in relation to the property’s applicable housing payment.

These programs can be particularly useful for self-employed investors, borrowers with complex tax returns, or investors building rental property portfolios.

Other Investor Loan Programs

Depending on the property and transaction, additional financing options may be available for investors who do not fit traditional conventional guidelines. Program requirements, rates, fees, loan-to-value limits, reserves, and eligible property types vary by lender and loan program.

How Rental Income Can Help You Qualify

Rental income may play an important role when financing an investment property. How that income is documented and calculated depends on the loan program, whether the property is currently rented, and the borrower’s individual scenario.

Depending on the program, lenders may use documentation such as an existing lease, appraisal-supported market rent, tax returns, or other permitted rental-income documentation. Not all rental income is necessarily counted dollar-for-dollar when determining qualification.

What Lenders Consider for an Investment Property Loan

Requirements vary by loan program, but lenders may evaluate several factors when financing an investment property:

• Credit profile: Credit history and score can affect eligibility, pricing, and available loan-to-value.
• Down payment or equity: Investment properties generally require more borrower equity than comparable primary-residence financing.
• Rental income: Existing or projected rental income may help support qualification when permitted by the loan program.
• Cash reserves: Some programs require funds to remain available after closing.
• Property type: Requirements can differ for single-family homes, condos, townhomes, and 2-4 unit properties.
• Existing financed properties: An investor’s other mortgages and real estate holdings may affect underwriting requirements.

There is no single minimum down payment, credit score, or reserve requirement that applies to every investment property loan. The requirements depend on the financing program and complete loan scenario.

Investment Property Purchase and Refinance Options

Investment property financing is not limited to purchasing a new rental property. Depending on the program and borrower qualifications, financing may also be available for:

• Purchasing a rental or investment property
• Rate-and-term refinancing
• Cash-out refinancing
• Refinancing an existing investment property into a different loan structure

Cash-out proceeds may provide investors with access to equity for additional investments or other purposes, subject to the applicable loan program and underwriting requirements.

What Types of Investment Properties Can Be Financed?

Eligible property types vary by lender and program but may include:

• Single-family rental properties
• Condos and townhomes
• 2-4 unit residential investment properties
• Long-term rental properties
• Short-term rental properties under eligible investor programs

Property condition, occupancy, rental strategy, project type, and other characteristics can affect which financing programs are available.

Investment Property Loans vs. Primary Residence Loans

A primary residence is a home the borrower intends to occupy as their principal residence. An investment property is generally purchased or held primarily to generate rental income, appreciation, or another investment return.

Because the occupancy and risk characteristics are different, investment property loans may have different interest rates, down payment requirements, reserve requirements, fees, and underwriting guidelines than primary-residence mortgages.

Which Investment Property Loan Is Right for You?

The best financing option depends on the property, rental income, purchase price or value, available down payment or equity, credit profile, reserves, existing real estate portfolio, and investment strategy.

Capital Home Loans can compare conventional and alternative investment property financing options to help determine which loan structure fits your scenario.