Mortgages for Investment Properties: What You Should Know Before Buying a Rental

However, rental property finance when applied properly can help build up wealth slowly but surely, as long as one applies conservative estimates and plans ahead.

In its study, The Federal Reserve Bank of St. Louis found that the average mortgage interest rate of the 30-year fixed-rate loan stood at 6.60% in 2025. Investors seeking finance for investment properties should be prepared for rates that would cost 1-2% more than that.

Quoting the real estate expert Ben Mizes, the president of Clever Offers:

"In my experience, the most frequent mistake made by new real estate investors trying to finance their rental property is incorrect cash reserve estimates and overly optimistic rental income assumptions. Investors should always plan for the worst-case scenario and not perfection."

Why Getting a Rental Property Loan Is Harder Than a Standard Mortgage

Rentals are considered risky investments by lenders. Tenants can move out, vacancies can occur, and repairs may affect cash flow. Therefore, lenders safeguard their interests by implementing more stringent requirements for approval, higher down payments, and increased interest rates.

Despite good borrower behavior in general, Fannie Mae recorded a serious delinquency rate of 0.58% for single-family mortgages as of December 2025, with multifamily mortgages experiencing some strain. It underscores the distinct risk associated with rental investments.

Pro Tip:

It is vital to begin forming your real estate portfolio before you urgently require funding. Lenders prefer borrowers who can demonstrate prior rental income history, which implies that your second rental will be easier to finance than your first.

What Counts as an Investment Property?

Prior to applying for a mortgage loan, you need to know how lenders categorize properties. The category a property falls under determines all aspects related to your loan agreement.

The most popular investment property categories include: single family home rented out to long-term tenants; two to four-unit multi-family building where you do not reside; vacation rental property located in a tourist area; and condominium or townhouses acquired purely for rental purposes.

When you reside in one unit while renting out other units within the same structure, most lenders will categorize such a property as owner-occupied and provide you with better mortgage terms. With five or more units, the property falls into commercial real estate lending that follows an entirely different process.

According to Mizes, however, "Current and previous occupancy status, leases and borrower representations are reviewed by lenders. Any misrepresentations may result in loan recall and even criminal charges."

Types of Investment Property Mortgages

However, all loans are not alike. Below is the list of most frequently utilized programs for rental property financing.

Conventional Investment Loans

They are made in accordance with the rules set by Fannie Mae and Freddie Mac. Most lenders require from 15% up to 25% down payment. It is preferable to have a credit score of at least 700; otherwise, the terms will be less beneficial.

Portfolio Loans

These loans are kept on the bank's balance sheet and are not being sold to other investors. This feature offers a lot of flexibility when it comes to qualifications. There is no requirement for income, property, and number of other homes funded. The catch is that rates on non-conforming loans are slightly higher than on conventional loans.

DSCR Loans

DSCR loans are those where qualification happens depending on the rent income of the property. Usually, lenders prefer DSCR of 1.25 or higher. It means that rent income should be high enough to cover mortgage payments. This kind of loan is suitable for landlords with complicated income structures.

Hard Money Loans

Short term financing from six months to a maximum of three years, highly dependent upon the property value and exit plan. High-interest rates, typically between 9% and 12% or above, however, funds can be disbursed quickly. Mostly used for fix-and-flip investments and when the pace is a priority over the cost.

"The conventional type is preferred by small portfolios, DSCR is suitable for cash flow investors, and portfolio or hard money is best for velocity investments. They each have a higher cost due to their flexibility."

Ben Mizes

What Interest Rates to Expect on Investment Property Loans

Your rates will vary according to the lending agency and your profile, but you can get an idea as follows of 30-year fixed rates expected for 2026:

• Conventional: 7% - 7.5%

• Portfolio: 7.5% - 8.5%

• DSCR: 8% - 9.5%

• Hard Money: 9% - 12%+

Investment property borrowing rates are at around 6.9% to 7.4% for the conventional product in early 2026, while similar mortgages are about 0.5 to 1 percentage points below.

While a one percent variance in rates may seem insignificant, it would mean a monthly increase in payment by hundreds of dollars and several thousands over the period of 30 years, on $300,000 worth of debt.

Pro Tip:

Most DSCR loans do not affect the personal DTI in the same way that traditional loans do. When investors are growing their portfolio, it could be wise to consider DSCR loans since it won't affect their personal DTI ratio.

Down Payment Requirements for Investment Properties

However, this difference in loan structures is very different from traditional house purchases. While traditional home buyers can make down payments that start as low as 3%, the typical down payment for investment property purchasers is between 15% to 25%.

How Property Type and Credit Affect Your Down Payment

If the borrower has good credit (above 740), then down payments of 15% to 20% are usually required when buying a single-family home as an investor. Meanwhile, multifamily properties (two to four units) usually require 20% to 25% down since there is higher potential risk regarding vacancy and maintenance.

After three or four financed properties, borrowers might have to pay down payments of 25% to 30%. If it is a fixer upper, it will be expected that such properties would require such down payments too.

What a Larger Down Payment Actually Saves You

Larger payments do not solely satisfy the criteria set by the lender but, for every increase of five percentage points, you save between 0.125 to 0.25 percent of interest.

In a loan amount of $300,000, increasing your down payment from 15% to 25% could save you an estimated $50 to $100 monthly, which amounts to several thousands of dollars in a thirty year period.

Based on the Q3 2025 Down Payment Report conducted by Realtor.com, an investment property buyer puts a median payment of 26.7%, equating to around $84,200 for an average investment home price. This is much higher than the median down payment of all buyers of 14.4%.

Pro Tip:

If you're able to go up to 25% down, do the math. It may be well worth your while. Otherwise, that money might be better spent elsewhere.

Cash Reserve Requirements

Besides the down payment, there are still liquidity requirements on how much cash should remain in your bank account. Typically, the rule is that two to six months' worth of mortgage payments must remain for each financed investment property. Of course, more money will have to be retained when you have more investment properties.

Take a look at an example of required reserves based on different mortgage payments below:

These reserves may come from your savings account, money market account, or retirement fund accounts. Projected rental income cannot be counted.

Loan Term Options: Which One Works for You?

30-Year Fixed

This is the most common method of financing investment properties. Monthly payments are kept low, allowing you to set aside cash for vacancy costs and repairs. Of course, the downside is having to pay the most interest overall.

20-Year Fixed

An in-between solution. Slightly increased payments but fast accumulation of equity and substantial interest saving in comparison with a 30-year mortgage.

15-Year Fixed

Maximum payments, minimum total interest charges. Interest rates for 15-year mortgages tend to be slightly lower than those of 30-year mortgages, making 15-year mortgages more attractive for investors that have good cash flows and want to pay off their debt quickly.

For example:

Taking a $300,000 mortgage at 7.5%, you will save on interest payments considerably despite monthly payment increases.

Adjustable-Rate Mortgages (ARMs)

ARMs with terms such as 5/1, 7/1, and 10/1 years allow an investor to borrow money at rates that are about 0.5-1 point lower than similar fixed-rate mortgages, but the ARM works under the assumption that the investor plans to repay the loan either by selling the asset or obtaining another loan before the end of the term. However, market conditions may change.

As Mizes says 

 "Rate discounts have to be substantial enough to improve cash flow and timing of exits. Otherwise, the risks associated with refinancing are too high."

Credit and Income Standards Lenders Use

Credit Score Benchmarks

Lenders prefer to see a score between 680 and 700 to consider a financing application for an investment property loan. Reaching the 700 point mark will make sure you receive competitive prices, while hitting 740 will get you the lowest interest rates possible.

Based on data presented by Freddie Mac in Realtor.com, going from having a credit score in the 660-720 category to one in the 720-760 category will lower your mortgage interest rates by around 0.11 percent, on average.

Debt-to-Income Limits

DTIs of conventional lenders tend not to exceed 43% to 45%, even when you include your mortgage payments in the calculations. Lenders that offer DSCR mortgages do not impose such restrictions, and they take into account only the property's cash flow instead of your income.

Income Documentation and Reserves

The applicant must be ready to provide at least two years of tax history with proof of stability of income, plus evidence of all income from rent from real estate investments currently held. The typical amount of reserves kept is between two and six months of payments per each investment property.

Pro Tip:

If you are self-employed, then you need to pay attention to how aggressively you take tax deductions. Too many in the year prior to applying for a home purchase loan can harm your qualifying chances even though you benefit financially.

How Rental Income Factors Into Your Qualification

Projections of future rental income are allowed by lenders to reduce debt-to-income ratios. However, you can expect that 75% of projected market rent is used for the purposes of the ratio calculation. For example, an appraiser may project market rent of $2,000 a month, but you can only rely on $1,500 to reduce debt-to-income ratios.

Pro Tip:

Prior to the formal valuation process, request the rental assessment separately. Should the comparable rent amounts appear too low compared to your local real estate market, provide the relevant numbers yourself based on rents collected from other similar properties in the neighborhood.

Weighing the Pros and Cons of Investment Property Financing

Real-estate investor Shawn Zar of Sell My House Fast has this to say on the topic of cash versus finance: "Cash gets you deals. Hence, if I need speed or leverage, I will go with the former. In the bigger picture, however, financing is great as it enables growth without tying down all my money into one place. Leverage is great when everything adds up and is boring, but it is dangerous when the numbers stretch out."

Pro Tip:

Assume a yearly vacancy rate of 8% to 10% along with an annual maintenance rate of 10% to 15%. Underestimation is better than overestimation in this regard.

How to Lock In Better Rates on Your Investment Property Mortgage

But getting the lowest rate is not all about maintaining high credit scores. Timing, preparation, and aggressive shopping are key factors.

Work on your credit early.

Lower your credit utilization ratio by repaying your balances below 30 percent and get any errors corrected on your credit report well ahead of three to six months before applying for a loan.

Put more down if you can.

Even a little difference, like five percentage points, could save you from 0.125 to 0.25 interest points. Over time, this savings will compound itself substantially.

Get quotes from multiple lenders.

It is essential to shop around and consider three to five choices, such as banks, credit unions, and mortgage firms that specialize in investment real estate. You must compare not only the rate but also the closing costs.

Apply when your finances are stable.

Keep off job changes, major debts, or irregular earnings in the year up to two years prior to applying for a rental property mortgage.

Zar's approach:

"I start my search locally and come in with facts, not fiction, and I don't take the first offer just because it looks 'good'. I negotiate for better terms and will walk away from deals that have great cash flow."

Frequently Asked Questions

Can I use an FHA loan for an investment property?

No. You have to occupy the FHA mortgage for at least one year. But you can get one for a 2 to 4 unit structure provided you occupy one unit and rent out the rest.

How many investment properties can I finance at once?

They typically allow from 4 to 10 units to be financed. Above that, you may have to find a portfolio lender or a commercial mortgage program.

Can I refinance an investment property to get a lower rate?

Yes, although the qualifications are not much different from those on a purchase mortgage. You will need some equity and pay slightly higher interest than a first home refinance would demand.

Do I need an LLC to buy rental property?

No, an LLC protects you from liabilities but does not have to be formed. Some people keep their investments in their names only and later transfer them to an LLC.

What if I can't find tenants after buying?

You have to cover the entire mortgage payment regardless of whether the house is rented or not. That is why banks check your reserves and want you to sign off on covering the mortgage even without the rental proceeds.

Final Thoughts on Investment Property Mortgages

Mortgages on investment properties require a lot of effort, a lot of money, and a lot of patience compared to buying a regular home. Their interest rates are much higher, their down payments are higher, and the requirements for qualification are stricter.

However, the principles stay the same. Rent can cover the mortgage, while tenants create equity for you. The secret behind successful investing is to test the calculations prior to making the investment, to have extra funds and to never plan everything perfectly.

Zar expressed it excellently: "I focus only on transactions that work during hard times. I save my money ahead of time and plan for problems that come. Success is about surviving for me, not about growing fast."

Work with several lenders, make realistic predictions, and always ensure that you will cope with unforeseen situations. These rules make rental financing advantageous in any circumstances.