Conventional Loans for Investment Properties

Why Conventional Loans Are the Starting Point

Conventional mortgages backed by Fannie Mae and Freddie Mac offer the best combination of low interest rates, long terms, and predictable payments available to real estate investors. A 30-year fixed rate mortgage on an investment property eliminates interest rate risk entirely and locks in your largest expense for three decades. For most investors buying their first several rental properties, conventional financing should be the first option explored.

Investment property conventional loans carry interest rates approximately 0.5% to 0.875% higher than primary residence rates. On a $250,000 loan, that translates to roughly $75 to $135 more per month compared to a primary residence mortgage. Even with the premium, conventional rates are significantly lower than DSCR, hard money, or commercial loan rates.

Qualification Requirements

Credit score. The minimum is 620, but the pricing tiers make a significant difference. A borrower with a 740 credit score may get a rate 0.5% to 0.75% lower than someone at 680. On a $200,000 loan, that saves $80 to $125 per month.

Down payment. Single-family investment properties require 15% down. Two to four-unit properties require 20% to 25%. These minimums apply to purchase transactions; cash-out refinances typically require 25% to 30% equity regardless of unit count.

Debt-to-income ratio. Conventional lenders allow a maximum DTI of 43% to 45%. Rental income from the property being purchased can be used to qualify, but lenders only count 75% of the market rent (to account for vacancies and maintenance). Rental income from existing investment properties is also counted at 75%.

Reserves. Expect to show 6 months of PITI (principal, interest, taxes, and insurance) in liquid reserves for each investment property you own. If you have 4 investment properties with $1,500 monthly PITI each, you need $36,000 in reserves. This requirement is one of the biggest hurdles for scaling with conventional financing.

Property limit. Fannie Mae allows up to 10 financed properties per borrower. Properties 5 through 10 come with stricter requirements: 25% down payment, 720 minimum credit score, and 6 months reserves per property. Freddie Mac limits investors to 6 financed properties.

Strategies for Maximizing Conventional Financing

Use conventional loans first. Because conventional loans offer the best rates, use them for your first 4 to 6 properties. Switch to DSCR or portfolio loans only when conventional qualification becomes difficult.

Reduce reported DTI. Pay down revolving debt before applying. Every $300 in monthly debt payments you eliminate adds roughly $20,000 to $25,000 in borrowing capacity. Closing unused credit cards does not help (they do not count toward DTI if they have zero balance), but paying down balances does.

Build reserves systematically. The reserve requirement is cumulative and grows with each property. Set aside a fixed percentage of rental income each month specifically for reserves. Liquid reserves include checking accounts, savings accounts, money market funds, and vested retirement accounts (counted at 60% of value).

Time your applications. If you plan to buy two properties in a year, apply for both simultaneously or close to it. Each closed loan increases your DTI and reserve requirements, making the next one harder. Some investors work with a single lender to close multiple properties in a short window before the new debts appear on their credit report.

Limitations to Understand

Conventional loans cannot be made directly to LLCs or business entities. You must borrow in your personal name and can transfer to an LLC afterward, though this technically triggers the due-on-sale clause (lenders rarely enforce it on performing loans, but the risk exists).

Properties must be in habitable condition. Conventional lenders will not finance properties that need significant repairs, have safety hazards, or lack functioning utilities. For distressed properties, you will need to look at renovation loans or short-term financing.

The 10-property Fannie Mae limit is firm. Once you reach it, conventional financing is no longer available, and you must transition to other loan products that typically come with higher rates and shorter terms.

For general tips on getting approved for investment property financing, see Tips for Getting Approved for an Investment Property Mortgage.