Can I Buy an Investment Property with a Conventional Loan?
Conventional loans are one of the most effective tools for building a real estate investment portfolio. Here is what you need to qualify, how rental income helps, and what changes when buying an investment property versus a primary residence.
Down payment requirements
- 1-unit investment property: Minimum 15% down. In practice, 20–25% is common to avoid high PMI costs and optimize pricing.
- 2–4 unit investment property: Minimum 25% down.
Gift funds are not permitted for investment property down payments — all funds must come from the borrower’s own eligible assets.
Reserve requirements
Investment properties require 6 months of PITI (principal, interest, taxes, and insurance) in reserves for the subject property. If you own other financed investment properties, additional reserves are required for each. Reserves must be liquid or near-liquid — retirement accounts count at a discounted rate.
Using rental income to qualify
Rental income from the investment property can help offset the payment for qualifying purposes. Lenders typically apply 75% of the gross rental income to account for vacancy and expenses. For a purchase with no existing lease, the appraiser’s market rent analysis can be used with the same 75% factor.
Maximum financed properties
Fannie Mae and Freddie Mac allow up to 10 conventionally financed properties simultaneously, including your primary residence. At 7 or more, the minimum credit score increases to 720 and additional reserve documentation is required. Beyond 10 properties, portfolio or DSCR financing becomes the typical alternative.
Pricing on investment properties
Investment property loans carry additional loan-level price adjustments (LLPAs) beyond primary residence rates. Expect the rate on an investment property to be higher than on a comparable primary residence loan, depending on your specific profile.
A worked example (illustrative example, not a quote)
You plan to buy a $600,000 single-family rental. The appraiser’s market rent analysis comes in at $3,600 a month, and the full monthly payment (principal, interest, taxes, and insurance) is $3,800.
| Item | At 15% down | At 25% down |
|---|---|---|
| Down payment | $90,000 | $150,000 |
| Six months of reserves ($3,800 × 6) | $22,800 | $22,800 |
| Cash before closing costs | $112,800 | $172,800 |
For qualifying, 75% of $3,600 rent is $2,700. Against a $3,800 payment, the shortfall is $1,100 a month, which is added to your other debts in the debt-to-income calculation. For simplicity the table holds the $3,800 payment constant at both down payment levels; in practice a larger down payment means a smaller loan, a lower payment and a smaller shortfall.
Documents to gather
- Two months of bank and retirement statements showing the down payment and reserves
- Two years of tax returns, including Schedule E for any rentals you already own
- Current leases for existing rentals, plus mortgage statements for every financed property
- A real estate purchase contract; the lender orders the appraisal and rent schedule
Common mistakes
- Counting 100% of the rent instead of 75%, which overstates how much you can afford.
- Planning on gift funds for the down payment. They are not permitted on investment properties.
- Moving money between accounts in the weeks before applying, which creates deposits that need explanation.
- Forgetting insurance, HOA dues, and a vacancy cushion in your own cash flow math.
Frequently asked questions
If I live in one unit of a duplex, do investment property rules apply?
No. A 2–4 unit building you occupy is financed as a primary residence, which has different down payment rules. Rent from the other units may help you qualify, depending on the program and documentation.
What if the property is vacant when I buy?
The appraiser’s market rent estimate is used instead of a lease, with the same 75% factor.
When does conventional stop making sense for an investor?
When your tax returns understate your real cash flow, or you are near the 10-property limit. Debt service coverage ratio loans qualify the property on its rent instead.
Related guides
- The 10-property limit and how it counts
- DSCR loans for investment property
- Short-term rental income and qualifying
- Down payment by property type
Key takeaways
- Investment property minimum down: 15% for 1-unit; 25% for 2–4 units.
- Gift funds are not permitted for investment property down payments.
- 6 months PITI in reserves required for the subject investment property.
- Up to 10 conventionally financed properties allowed; 7+ requires a 720 minimum score.
- Rental income at 75% of gross can be used to offset the property payment for qualifying.
- Investment property rates are typically higher than primary residence rates.
- Plan for the down payment plus six months of reserves on the subject property before closing costs.
- Rent counted at 75% can still leave a shortfall that is added to your monthly debts.
- Living in one unit of a 2–4 unit building makes it an owner-occupied loan, not an investment loan.
Ready to explore your conventional loan options? Lendia can walk you through what you qualify for and find the right program for your goals.