How to get an Investment Property Loan

What is an investment property loan?

Investment property loans are used for the purchase of second homes and investment properties, including one- to four-unit residential properties and vacation properties. U.S. Bank offers a variety of investment property loans to suit nearly every need. As an option, if you currently own a home you may be able to use your current home equity to finance buying additional property. To learn more about real estate investment loans and current investment property loan rates, contact an Investment mortgage loan officer.

Requirements and qualifications for Investment property loan

Credit score - Generally, the higher your credit score, the better your chances of qualifying with the best possible rate. You can strengthen your ability to qualify by taking steps to build and maintain a solid credit history and score prior to applying for a loan. If you’re a current U.S. Bank customer, you can monitor your credit for free with our tool.
Down payment - An investment property down payment is typically higher than that of a primary residence. A down payment of 20% or more does have advantages though. When you put more money down, you're taking some of the risk away from the lender – proof that you’re invested in the purchase and a sign that you’re committed to making all your mortgage payments. In return, the lender may offer you a lower mortgage interest rate.
Cash reserves - You should have assets readily available to cover six to 12 months of mortgage payments. The amount of reserves necessary can vary by loan type but may be a bit stricter for investment property loans since they represent an added risk to the lender. Cash reserves show the lender that you’ll have the ability to keep up with your mortgage payments, even if something happens to your regular paycheck.
Debt-to-income – DTI, or the percentage of your income paid out to debts should be no more than 50%.
Proof of income – steady income must be shown. For the typical employee, this generally means providing pay stubs and W2s, while self-employed borrowers may also be required to provide two years of tax returns.

How to get an investment property mortgage

Here are some tips to get an investment property loan at the best possible rate:

Get your credit and down payment in order: Well before applying for an investment property loan, take steps to improve your credit score (or maintain an already-strong score) and organize the funds for a down payment and closing costs. In general, lenders give the best rates to borrowers with a credit score of 740 or higher and a higher down payment than the lender’s minimum requirement.
Take stock of debt: Now’s the time to pay down or pay off debt and understand your debt-to-income (DTI) ratio, which impacts the interest rate on your loan. If you own more than one property, your lender will want to know about any mortgages on it. Ditto for debt like a car loan or student loan. If you plan to buy the investment property through an LLC, your lender might want to see paperwork tied to that, too.
Compare rate quotes: When you’re ready to look for properties, get rate quotes from at least three mortgage lenders. These might include a community bank, credit union or a lender you’ve done business with before. A mortgage broker can also help you find the right loan. Because fewer lenders finance investment properties, this takes a bit more work compared to shopping for a conventional loan on a primary residence. Consider the APR, or annual percentage rate, which reflects the interest rate and any lender fees and points.
Research borrower experience: Before you decide to go with a lender, see what others have to say about it. Read consumer reviews, check its status on review sites and see if it's been awarded a J.D. Power award for servicing.

Advantages (Pros) and Disadvantages (cons) of investment property Loan

Pros of investment property loans

You can borrow more compared to a conventional conforming loan. Investment property mortgages don’t have set loan limits, unlike conforming loans.
You don’t have to live in the property. Unlike a loan for a primary residence, you don’t have to live in the property to get an investment property loan.
You can deduct mortgage interest. If you itemize your tax return, you can deduct mortgage interest, as well as other rental expenses.

Cons of investment property loans

You’ll have a higher interest rate compared to a loan for a primary residence. Investment property mortgages are riskier for lenders. Added risk translates to higher interest rates.
You’ll need to meet stricter underwriting requirements. When compared to a mortgage for a primary residence, investment property mortgages often require more cash reserves, a better credit score and a higher down payment.

What can an Investment Property Loan be used for?

Investment property loans can be used to finance a variety of income-generating properties:

Commercial: properties to be leased or renovated for resale and commercially zoned or agricultural land to be developed, leased, or resold.

Residential: single or multi-family properties to be rented or renovated for resale (‘flipped’) or residential land to be developed or resold.

Types of Investment Property Loans

If you’re interested in getting a loan to buy an investment property, you have more than one option. Banks, credit unions and online lenders can offer investment property loans.

The range of loans you have to choose from can depend on the lender, while the loan terms that you’re able to qualify for can hinge largely on your credit score, income and the specifics of the property.

The main types of investment property loans include:

Conventional Loans - A conventional loan may be your first choice if you’re planning to buy a single-family home as an investment property. Conventional loans can offer fixed rates and longer loan terms, but you’ll likely need a higher credit score to get the lowest rates.

FHA Loans - The Federal Housing Administration (FHA) allows you to use FHA loans to buy investment properties with multi-family homes with up to four units. There is one requirement: You’ll need to live in one of the units for at least 12 months to qualify.

VA Loans - Veterans and military service members can use the VA loan program to purchase investment properties with as many as seven units, with no money down. Similar to FHA loans, borrowers must live in one of the units to qualify.

Owner Financing - A less traditional option for buying an investment property is owner financing. With this type of arrangement, you borrow from the seller and make payments back on a set schedule. This type of loan agreement may require you to make one large balloon payment at the end of the term.

Home Equity Loans - If you own a home and have a significant amount of equity, you could borrow against it to buy an investment property. A home equity loan provides you with a lump of money that you might use to buy a second home to rent out. Similar to first mortgage loans, home equity loans can offer fixed rates and lengthy terms.

Hard Money Loans - Hard money loans or bridge loans are more commonly used to purchase fix and flip properties. With these loans, you can get the money you need to buy the property and renovate it, but you typically have to pay it back within 12 to 18 months.

When searching for an investment property loan, it’s important to check the minimum qualification requirements first. That can help you weed out loan options that aren’t a good fit. Once you’ve narrowed down the list, you can take a second look to compare interest rates, down payment requirements, fees and loan terms.