Down Payment Requirements for Investment Properties

A conventional loan on a rental you will not live in requires at least 15% down for a single-family home, condo, or townhouse and 25% down for a 2-4 unit building. FHA (3.5% down) and VA (no down payment) loans can be used only if you will live in one of the units. On a conventional rental loan, the down payment must be your own money: Fannie Mae does not allow gift funds on an investment property, and the seller cannot pay any part of the down payment.

Minimum down payment by loan type

Lenders state the limit as a maximum loan-to-value ratio (LTV), the loan amount divided by the lower of the price or the appraised value. An 85% maximum LTV means a 15% minimum down payment.

For a conventional 1-unit rental, 15% down is the minimum, not the cheapest option. Fannie Mae requires mortgage insurance on any conventional loan above 80% LTV, and its loan-level price adjustments for rentals (upfront fees Fannie Mae charges lenders by risk, which lenders pass to you as points or a higher rate) step down at 80% and again at 75% LTV. Putting 20% down avoids the mortgage insurance, and 25% down lowers the pricing adjustment again. Conventional loans for investment property covers how those tiers affect the payment.

The FHA and VA routes are for owner-occupants. FHA's 3.5% applies to a 2-4 unit building only when you live in one unit, and three- and four-unit buildings must also pass FHA's rent test. FHA loans for owner-occupied multifamily and VA loans for real estate investment explain the occupancy rules and what happens when you move out.

Which down payment sources lenders accept

For a conventional investment purchase, the lender must trace every dollar of the down payment, closing costs, and reserves to an acceptable source. FHA owner-occupied loans are more flexible.

Fannie Mae's rule on secured borrowing is broad: funds borrowed against real estate, a car, savings, stocks, or a 401(k) can cover the down payment, closing costs, and reserves. If the same account also counts toward your reserves, the lender subtracts the amount borrowed from its balance.

A seller credit above the cap does not disappear. Fannie Mae treats the excess as a sales concession and deducts it from the price, and the lender recalculates the LTV on the lower figure, which raises the down payment needed to stay under the limit.

Worked example: total cash to close

You are buying a $300,000 single-family rental with a conventional loan and 20% down to avoid mortgage insurance. The rate, taxes, insurance, and closing costs below are assumptions for the example; use the figures from your lender's written quote.

• Loan: $240,000 at an assumed 7.875% for 30 years. Principal and interest: $1,740 a month.
• Property taxes $300 a month and insurance $150 a month, with no association dues, so PITIA (principal, interest, taxes, insurance, and association dues) is $1,740 + $300 + $150 = $2,190.
• You own one other rental with a $150,000 mortgage balance.

The reserves stay in your accounts after closing, so the cash that leaves at closing is $69,000. A 2% seller credit ($6,000) could cut the closing cost line to $3,000, but it cannot reduce the $60,000. With 15% down instead, the down payment falls to $45,000, but you add monthly mortgage insurance and pay higher pricing on a loan of $255,000.

Fannie Mae's reserve percentage rises with the number of financed properties you have, counting your own home if it has a mortgage: 2% of the other properties' balances with one to four financed properties, 4% with five or six, and 6% with seven to ten. Your home's mortgage is counted in the property total but its balance is left out of the calculation.

Ways to reduce the cash you need

1. Buy a 2-4 unit building and live in it. An FHA loan at 3.5% down on a $400,000 fourplex is $14,000, compared with $100,000 at the 25% minimum for a fourplex you would not live in. A conventional loan on a 2-4 unit home you live in can allow 5% down ($20,000 here) when approved through Fannie Mae's automated system. FHA adds mortgage insurance, and it also requires three months of mortgage payments in reserves after closing on a three- or four-unit building, and borrowed money does not count toward them.
2. Borrow against an asset you own. A HELOC or 401(k) loan can fund the down payment on a conventional rental loan. Using a HELOC for an investment property down payment covers the risk of borrowing against your home.
3. Ask for a seller credit toward closing costs. Keep it within 2% of the lower of the price or appraised value on a conventional rental loan.
4. Compare 15%, 20%, and 25% down. Ask the lender for the payment and cash to close at each level. The lowest down payment can cost more each month through mortgage insurance and pricing.
5. Plan your total budget, not just the down payment. How much money you need to start adds repairs and vacancy to the cash needed at closing.

For the credit score, DTI, and documentation lenders check beyond the down payment, see tips for getting approved for an investment property mortgage.