Investment Property Loans: Your Options for Buying, Refinancing and Tapping a Rental

What counts as an investment property loan

A loan on property you don't live in. The CFPB's commentary to Regulation Z treats credit to buy, improve or maintain a rental the owner doesn't occupy as business credit. For Regulation Z purposes, if you expect to stay in the property more than 14 days in the coming year, it counts as owner-occupied. Lenders and loan programs apply their own occupancy rules, and a home you live in, even one with rental units, is financed differently. See investment property loan requirements.

Conventional loans for rentals

Conventional loans sold to Fannie Mae and Freddie Mac follow their rules. Freddie Mac allows up to 85% loan-to-value on a one-unit investment property and 75% on 2 to 4 units, for loans with an Accept from its automated underwriting, so 15% or 25% down. Fannie Mae's automated underwriting asks for six months of reserves on an investment property, allows a debt-to-income ratio up to 50%, and counts 75% of a long-term rental's gross rent before subtracting the payment. It caps investment-property borrowers at 10 financed properties. See how much down payment you need.

Home equity on a rental

If you already own a rental with equity, you can borrow against it at lenders that offer it. Published investment-property HELOC programs cap borrowing at 70% to 80% of the property's value, and one lender offers lines in first or second lien position. One lender also publishes a home equity loan for investment properties: a lump sum with fixed payments over 20 or 30 years, up to 75% combined loan-to-value at credit scores of 700 and up. Title rules vary: one network's equity lines require title in your own name or a revocable trust. See HELOCs on an investment property.

Refinancing a rental

Two kinds. A rate-and-term refinance changes the rate or term with little cash back; Fannie Mae limits the cash to the greater of 1% of the new loan or $2,000. A cash-out refinance takes a larger loan and pays you the difference; Freddie Mac allows up to 75% loan-to-value on a one-unit rental and 70% on 2 to 4 units, and Fannie Mae wants at least one borrower on title for six months. DSCR lenders publish their own cash-out options. See how to refinance a rental property.

DSCR loans

A DSCR loan qualifies on whether the property's rent covers its payment, with no tax returns or W-2s in the published programs. The programs we read publish limits that mean 15% to 25% down, minimum ratios from below 1.0 to none at all, and credit minimums that vary by lender. Two lenders put no limit on how many financed properties you can own. Lenders set their own terms, including prepayment penalties, so compare them side by side. For a short-term rental, some lenders run a separate program with its own limits. See DSCR loans.

Costs and rates

Conventional rental loans cost more because the agencies price the risk. FHFA, which oversees Fannie Mae and Freddie Mac, lists occupancy, with investment properties as an example, among the key risk attributes for their upfront fees, alongside loan-to-value, credit score, refinance type and property type. Those fees are layered, so an investment property with a high loan-to-value carries both. A bigger down payment and a stronger credit score are the parts you control. See why investment property rates are higher.

Borrowing through an LLC

You don't have to; the lenders we read let you borrow as an individual. If you want an LLC to hold the property, some DSCR lenders allow it. One lets a U.S. LLC borrow with a personal guarantee, another allows LLC, corporation or trust vesting, and a third will help move properties from individual conventional loans into your LLC. Regulation Z doesn't cover credit to an organization such as an LLC or corporation, though the official interpretation preserves coverage for certain trusts held for consumer purposes. Equity lines are harder: one network requires title in your own name or a revocable trust. See DSCR loans for an LLC.

Comparing lenders and quotes

Line up the same items from each lender: the down payment or loan-to-value limit, credit score and reserve requirements, how it counts the rent, the prepayment penalty and every fee. Regulation Z's disclosures aren't required for credit to acquire, improve or maintain a rental property you don't live in, or for other genuinely business-purpose credit. A loan you take against a rental for your own personal purposes is not automatically exempt, so ask for terms in writing either way. Ask, too, whether the lender will use your lease or the appraiser's market rent, since that changes how the property qualifies. Two or three quotes on the same day make the differences easy to see. See how to compare DSCR loan quotes.

Frequently asked questions

What is the best loan for an investment property?

It depends on how you qualify and what you're doing. A conventional loan suits a buyer whose income documents qualify and who is under Fannie Mae's limit of 10 financed properties. A DSCR loan suits an investor who would rather qualify on the property's rent. A HELOC or home equity loan suits an owner who wants to borrow against a rental already owned.

How much down payment do I need?

On a conventional loan, Freddie Mac's limits mean at least 15% down on a one-unit rental and 25% on 2 to 4 units. The DSCR programs we read publish limits that mean 15% to 25% down.

Can I use a HELOC to buy or fix a rental?

You can take a line against a rental you already own at lenders that offer one, and Regulation Z's commentary treats credit to improve or maintain a rental as business credit. One lender's home equity loan allows the funds for personal or business use. Ask the lender how it treats using the money for another purchase.

Do I need an LLC?

No. The lenders we read let you borrow as an individual. Some DSCR lenders also let an LLC borrow, and one asks for a personal guarantee when it does.

Can I get a loan on a rental I already own?

Yes: a rate-and-term or cash-out refinance, a HELOC, or a home equity loan. Freddie Mac allows a cash-out refinance up to 75% loan-to-value on a one-unit rental, and published investment HELOCs cap borrowing at 70% to 80% of the value.

What credit score do I need?

Fannie Mae sets a minimum of 620 for fixed-rate loans and 640 for adjustable-rate loans, and no fixed minimum for files run through its automated underwriting. The DSCR programs we read publish minimums that vary by lender.

How is a rental loan different from a home loan?

It asks for more. Freddie Mac allows up to 95% loan-to-value on a one-unit home you live in but 85% on a one-unit rental, and Fannie Mae's automated underwriting wants six months of reserves on an investment property but none on a one-unit home you live in. Rental loans also carry an extra pricing attribute for occupancy.

What is a DSCR loan?

A DSCR loan is a business-purpose mortgage for a rental you don't live in. It qualifies on whether the property's rent covers its payment, not on your personal income.