Conventional Loans for Investment Properties

A conforming loan, the kind of conventional loan sold to Fannie Mae or Freddie Mac, on a rental you will not live in must meet these rules: at least 15 percent down on a 1-unit property and 25 percent on 2 to 4 units, reserves required by the agency's underwriting system, and no more than 10 financed properties in total. The loan must be in your own name, not an LLC's. Fannie Mae sets no minimum credit score for loans approved through its automated system, but lenders can set their own.

Portfolio loans that a bank keeps on its own books are also conventional, but they follow that lender's rules, not the ones below. If you can qualify on your personal income and own fewer than 10 financed properties, a conforming loan is the one to check first. For approval steps that apply to every loan type, see our tips for getting approved for an investment property mortgage.

How much do you need to put down?

Freddie Mac's maximum loan-to-value (LTV) ratios, the loan amount as a share of the property's value, set the minimum down payment:

Three conditions change what you need:

• Mortgage insurance. Conventional loans above 80 percent LTV need mortgage insurance, so 15 percent down on a single-family rental adds mortgage insurance, paid monthly or as a single premium at closing depending on the plan. Putting 20 percent down avoids it.
• No gifts. Fannie Mae does not allow gift funds on an investment property. To borrow against your home for the down payment instead, see using a HELOC for an investment property down payment.
• Pricing. The rate depends on the property type, your score, and your down payment. See interest rates for investment properties for what to expect.

For where the down payment can come from and how it changes with unit count, see down payment requirements for investment properties.

What credit score do you need?

For loans run through Desktop Underwriter (DU), Fannie Mae's automated underwriting system, the Selling Guide says no minimum credit score is required. DU assesses your credit through its own risk factors instead of a score cutoff, along with your down payment, reserves, and debts. Manual underwriting is not an option for a rental: Fannie Mae requires every investment property loan to get an Approve/Eligible result from DU, and Freddie Mac requires approval from its own system, Loan Product Advisor.

Two things still push you toward a higher score. Lenders may set a minimum of their own, and a lower score raises the rate you are offered. Ask each lender for its floor before you apply.

How much do you need in reserves?

Reserves are money you still have in your accounts after paying the down payment and closing costs. For Freddie Mac loans, the lender must verify the reserve amount shown on Loan Product Advisor's Feedback Certificate. For a DU loan on an investment property, Fannie Mae requires:

• 6 months of the new property's payment, counting principal, interest, taxes, insurance, and any HOA dues (PITIA).
• A percentage of the balances on your other financed properties, not counting your home or the property you are buying:
• 2 percent if you will have 1 to 4 financed properties
• 4 percent for 5 or 6
• 6 percent for 7 to 10

Worked example

You own your home and 2 rentals with mortgage balances of $180,000 and $220,000. You are buying a third rental with a monthly PITIA of $2,000. Counting the new rental, you will have 4 financed properties.

• New property: 6 x $2,000 = $12,000
• Other rentals: 2% x ($180,000 + $220,000) = $8,000
• Reserves needed: $20,000

At 7 financed properties, the same $400,000 in other rental balances would require 6 percent, or $24,000, before the 6 months on the new property. These are minimums; DU can require more reserves based on its overall risk assessment.

The 10-financed-property limit

Fannie Mae caps a borrower buying a second home or investment property at 10 financed properties through DU. The count includes:

• Every 1 to 4 unit residential property on which you are personally obligated on a mortgage, including your own home
• Each property once, even if it has two mortgages; a fourplex counts as one
• Properties you own jointly with a co-borrower, counted once
• Properties your co-borrower has financed on their own, since the count covers all borrowers on the loan

It does not include commercial property, buildings with more than 4 units, vacant lots, or timeshares, even if you signed for those loans.

As you get closer to 10, the main change is reserves: the jump from 2 percent to 6 percent of your other balances. Fannie Mae's current rule sets no separate credit score floor for 7 to 10 financed properties.

Qualifying with rental income

Lenders count 75 percent of the gross rent, from a lease or the appraiser's rent estimate, to allow for vacancy and upkeep, then subtract the property's full PITIA. For example, $2,400 rent x 75% = $1,800, minus a $2,000 PITIA, leaves a $200 shortfall. A shortfall counts as a monthly debt whatever your experience. A surplus counts this way:

• 12 months or more managing rental property: a surplus adds to your income.
• Less than 12 months: the rent can only offset the new property's own payment. A surplus cannot raise your income.

The lender also has to document your current housing payment before it can use any rent from the property you are buying. That rent feeds your debt-to-income ratio (DTI), your monthly debt payments divided by gross monthly income, which DU caps. For the limits and ways to stay under them as you add rentals, see managing your debt-to-income ratio.

Your name, not an LLC

Fannie Mae buys loans made to natural persons, with narrow exceptions such as certain revocable living trusts. An LLC, corporation, or partnership cannot be the borrower on a conventional loan sold to Fannie Mae.

If you deed the property to an LLC after closing, Fannie Mae's servicing rules treat that as an allowed transfer only when the loan was bought by Fannie Mae on or after June 1, 2016 and you control or own a majority of the LLC. The servicer must also tell you that the property has to be moved back into your name before you can refinance it. Freddie Mac loans follow Freddie Mac's rules, so ask your servicer before transferring title.

Signs you have outgrown conforming financing

• You are at or near 10 financed properties. An 11th property needs a portfolio, DSCR, or commercial loan.
• Your DTI is above what DU will approve, for example because you have less than 12 months of landlord history, so rent from a new rental cannot add to your qualifying income.
• You want the loan in an LLC's name from the start.
• Reserves at 6 percent of your other balances become large under Fannie Mae's DU rules: with $1 million in rental mortgages, that is $60,000 before the new property's 6 months.
• The property is 5 or more units, which falls under commercial lending.

At that point, a portfolio loan from a bank or a DSCR loan is the next step. DSCR loans qualify on the property's rent instead of your income and can close in an LLC.