Tips for Getting Approved for an Investment Property Mortgage

To get approved for a conventional mortgage on a rental you will not live in, plan on at least 15% down for a single-family home or 25% for a 2-4 unit building, six months of the new loan's payment in reserves, and a debt-to-income ratio of 50% or less. Lenders count only 75% of the expected rent, and if you have less than a year of landlord experience that rent can only offset the new property's own payment. If you will live in one unit of a 2-4 unit building, an FHA loan (3.5% down) or a VA loan (no down payment for eligible borrowers) is usually the lower-cash route.

What lenders require for a rental property loan

Conventional loans are written to Fannie Mae or Freddie Mac rules so lenders can sell them, which makes those rules the baseline for a rental purchase. The table summarizes Fannie Mae's current requirements for a purchase of a 1-4 unit investment property. Each row links to the page that covers it in detail.

Three of these rules need more explanation.

The 12-month experience rule. Fannie Mae lets the lender add a rental's positive net income to your qualifying income only if you have at least 12 months of property management experience, usually shown by a Schedule E on your last tax return listing a rental for a full year. Without that history, the rent can only cancel out the new property's own payment. A $2,400 market rent counts as $1,800, and if PITIA is $2,190, the $390 shortfall is added to your debts.

Reserves are cash left after closing. The lender must see money you still have once the down payment and closing costs are paid. Checking, savings, and the vested part of retirement accounts you are allowed to withdraw from count. Cash-out proceeds from refinancing the property you are buying do not.

Your current housing payment must be documented. Before any rent from the new property can count, the lender must verify what you pay now for your own home, through the credit report, a landlord's verification, or six months of bank statements.

Worked example: how much reserve cash you need

You are buying a single-family rental with a PITIA of $2,190 a month. You own your home with a mortgage and two other rentals with loan balances of $180,000 and $130,000.

1. Subject property: 6 months x $2,190 = $13,140.
2. Other financed properties: you have four financed properties in total, so the rate is 2% of the balances on the two rentals. Your home's mortgage is left out of this balance. 2% x ($180,000 + $130,000) = $6,200.
3. Total reserves: $13,140 + $6,200 = $19,340, held after closing.

The rate rises to 4% of those balances with five or six financed properties and 6% with seven to ten. DU can also ask for more based on the overall file.

Which loan fits your situation

Conventional loans fit most buyers with documented income and fewer than 10 financed properties. The other options exist for people who will live in the building, who cannot document income the way Fannie Mae requires, or who are buying something a conventional lender will not finance.

The FHA rent test for three- and four-unit buildings divides the full monthly payment by the appraiser's market rent for all units, including yours, after subtracting the greater of the appraiser's vacancy and maintenance estimate or 25%. The result cannot exceed 100%. FHA loans for owner-occupied multifamily covers the test and the move-out rules.

DSCR stands for debt service coverage ratio, the property's rent divided by its monthly payment. Federal rules treat credit to buy a rental the owner will not live in as business-purpose credit, which is why a DSCR lender can skip verifying your personal income and why Truth in Lending rules, including the Loan Estimate, do not apply. DSCR loans explained shows how lenders set the minimum ratio. For a property that needs a rehab first, see hard money loans.

Documents to gather before you apply

Lenders ask for the same core file for a rental as for a home you live in, plus proof of everything you already own.

• Income: Recent pay stubs and two years of W-2s, or two years of personal and business tax returns if you are self-employed.
• Tax returns with Schedule E: Your most recent Form 1040 with Schedules 1 and E for every rental you already own. This is how the lender measures existing rental income and your management experience.
• Leases: Current signed leases for rentals bought after your last tax return or not yet on Schedule E, plus two months of bank statements showing the rent is being paid.
• Assets: The most recent full statements for every account you will use for the down payment, closing costs, or reserves. Be ready to explain any large deposit that is not your paycheck.
• Every property you own: Mortgage statements, tax bills, insurance declarations, and HOA statements, so the lender can add up the full PITIA on each one.
• Your current housing payment: A mortgage statement, or six months of bank statements or canceled checks showing rent paid if your landlord does not report to the credit bureaus.

Steps to get approved

1. Count your financed properties. Include your home if it has a mortgage. This number sets your reserve rate and tells you whether a conventional loan is still available.
2. Check your credit reports and pay down card balances. Lower balances raise your score and cut the minimum payments that go into DTI.
3. Get preapproved with the rental in the file. Ask the lender to run the application with an estimated market rent and the full PITIA of the property you plan to buy, so the DTI you see is the DTI underwriting will use.
4. Pick your down payment tier. 20% down avoids mortgage insurance, and 25% down lowers the pricing adjustments Fannie Mae charges on rentals. Compare quotes at each level.
5. Get written quotes from at least three lenders. Because a rental you will not occupy is business-purpose credit, the lender does not have to give you a Loan Estimate. Ask for an itemized written quote from each, with the same number of discount points (upfront fees, each 1% of the loan, paid to lower the rate), so you can compare.
6. Watch the appraisal's rent schedule. The lender bases rental income on the appraiser's market rent (Form 1007 for one unit, Form 1025 for 2-4 units), and on the signed lease if one transfers to you with the property, checking the lease against market rent. If the rent comes in below your estimate, your DTI rises or your DSCR falls, and the approval can change.
7. Keep your finances unchanged until closing. Do not open new credit, change jobs, or move money between accounts without documenting the transfer. The lender reverifies before closing.