What is a Conventional Loan for an Investment Property?
Buying an Investment Property with a Conventional Loan: The terms of your mortgage can significantly impact the profitability of your investment property. Conventional loans often offer lower fees and interest rates compared to non-conforming loans, leading to smaller mortgage payments and potentially higher returns.
What Do Lenders Consider an Investment Property? Investment properties are real estate assets designed to generate income. These can include residential or commercial properties, but conventional loans typically apply to residential real estate with up to four units. Common examples of investment properties include:
- Single-family homes
- Multi-unit buildings (duplexes, triplexes, fourplexes)
- Condos
In 2024, loan limits for investment properties match those of primary residences. For instance, you can borrow up to $766,550 for a single-unit home in most areas, with higher limits in high-cost regions. Multi-unit properties may qualify for loan limits exceeding $2 million.
What Isn’t Considered an Investment Property?
If you plan to live in one of the units of a multi-family building, it is not considered an investment property for lending purposes. Similarly, second homes and vacation properties don’t qualify as investment properties, even if you generate some rental income from them. These properties follow different lending guidelines.
Down Payment Requirements for Conventional Loans:
When buying an investment property, expect higher down payment requirements than for a primary residence. Investment homes carry greater risk for lenders, so borrowers are required to make larger down payments as a buffer.
Fannie Mae and Freddie Mac mandate at least 15% down for single-family homes and condos, and 25% down for properties with 2-4 units. If you plan to live in a multi-family property, you may qualify for lower down payment requirements, potentially 5% down.
Borrower Eligibility for Investment Properties: Eligibility criteria for investment properties mirror those for primary residences but with stricter requirements.
Most lenders require:- A minimum credit score of 620 (increasing to 720 for seasoned investors with multiple properties)
- A debt-to-income (DTI) ratio typically capped at 43% (ideal is below 36%)
- For investment properties, you can use up to 75% of future rental income to reduce your DTI, helping to offset the loan amount.
Required Cash Reserves:
Investment property loans require borrowers to have more significant reserves than for a primary residence. Lenders will ask for six months’ worth of housing expenses, known as PITIA (principal, interest, taxes, insurance, and association fees). You’ll also need additional reserves if you own other properties with outstanding mortgages.
Using Rental Income to Qualify for a Loan:
Investment property buyers can use rental income to lower their DTI ratio, making it easier to qualify for the loan. If you’re already receiving rental income or have a history of managing properties, you can apply the full 75% of the rental income toward qualifying. For first-time investors, you may apply rental income only up to the amount needed to cover PITIA.
For example, if your property’s PITIA is $1,700, and you expect to rent it for $2,500 monthly, you can apply 75% of the rental income, or $1,875, toward qualifying for the loan.
Interest Rates for Investment Properties:
While conventional loans offer lower interest rates than alternative investment property loans, they come with higher rates than those for primary residences. Expect to pay between 0.5% and 1% more in interest, though this rate can fluctuate based on factors such as your credit score, down payment, and market conditions.
Finding the Right Lender:
Choosing the right lender is just as important as selecting the right property. Lenders experienced in conventional loans for investment properties can help secure the best rates and terms, maximizing your investment’s profitability.
If you're considering an investment property loan, working with a knowledgeable mortgage professional, like Mortgage Advisor, Dustin Dumestre (Brokered Loan Officer) can help you navigate the complexities and secure the best deal for your needs.