Two investors bought nearly identical duplexes three blocks apart in the same Ohio suburb last spring, both for around $395,000. One put 20% down on a conventional 30-year fixed at 6.9%. The other used a debt-service coverage ratio loan at 7.9% with 25% down. The first investor got the cheaper money. The second one closed in 19 days, held title in an LLC, and never handed over a single tax return.
Which loan was better? It depends entirely on what each of them planned to do next. That’s the whole problem with hunting for the best mortgage types for real estate investors — there is no universal winner. There’s only the loan that fits your strategy, your cash position, and how much paperwork you’re willing to tolerate.
Conventional loans: the cheapest money, the strictest gate
If you can qualify, a conventional loan from Fannie Mae or Freddie Mac is almost always the least expensive way to finance a rental. Rates run roughly 0.5% to 0.75% below portfolio and non-QM options, and you get full 30-year fixed terms with no prepayment penalty.
The trade-offs are real, though. Fannie caps investors at 10 financed properties, and each one beyond your primary residence adds reserve requirements. Expect lenders to want six months of payments on the subject property, plus roughly 2% of the outstanding loan balances on your other rentals sitting in the bank. On a portfolio with $1.5 million in mortgage debt, that’s an extra $30,000 you can’t spend on a down payment.
The numbers investors trip over
- Down payment: 15% for a single-unit investment purchase, 25% for two to four units
- Credit score: typically 620 minimum, though pricing improves sharply above 740
- Reserves: six months of PITI on the subject property, plus 2% of other financed properties’ balances
- Property condition: must be habitable and appraise clean — no deferred maintenance
Conventional is the right call for a stabilized rental you plan to hold for a decade with strong credit and plenty of cash. It’s the wrong call for a distressed property, a fast close, or your eighth deal when reserves are getting tight. If you’re weighing how a traditional lender would structure the deal versus a specialist, it’s worth reading up on how to choose the right mortgage in today’s market before you commit.
DSCR loans: the property qualifies, not you
Debt-service coverage ratio loans are the workhorse of scaling investors. Instead of looking at your W-2 income or your debt-to-income ratio, the lender divides the property’s market rent by its total payment — principal, interest, taxes, insurance, and any HOA dues.
A DSCR of 1.25 means the rent covers the mortgage by 25%. Most lenders want somewhere between 1.0 and 1.25, and pricing gets noticeably better above 1.20. Fall below 1.0 and you’ll either be declined or asked to bring more down.
What you get in exchange for a rate that’s typically 0.75% to 1.5% higher than conventional:
- No tax returns, no pay stubs, no employment verification
- Unlimited financed properties in most cases
- LLC borrowing allowed and often encouraged
- Interest-only options on some programs
- Short-term rental income accepted using projected nightly rates in many markets
Watch the prepayment penalty. DSCR loans commonly carry a 3-2-1 or 5-4-3-2-1 structure, which means selling or refinancing in year one can cost you three points — about $9,000 on a $300,000 loan. That penalty is the price of flexibility elsewhere. Non-QM lending has expanded fast, and the differences between programs are bigger than the marketing suggests; this breakdown of what actually makes a non-QM lender different is useful context if you’re comparing DSCR providers.
Hard money and bridge loans: speed costs money
Hard money lenders fund on the asset, not the borrower. Expect 65% to 75% loan-to-value against the after-repair value, rates from 10% to 14%, and 2 to 4 points at closing. Terms run 6 to 12 months, often interest-only.
Nobody builds a portfolio on hard money. It’s a tool for specific jobs: fix-and-flips, auction purchases that need to close in 10 days, and BRRRR deals where you buy, renovate, rent, and then refinance into a DSCR loan after the property seasons. The point is to pay 12% for six months, not 8% for thirty years.
The trap is the exit. If your refinance falls through because the appraisal comes in low or the rent doesn’t support the ratio, you’re staring at extension fees that can add 2% to your loan amount every three months. Line up the permanent financing before you close on the bridge.
FHA and owner-occupied loans: the house hack route
Owner-occupied financing remains the cheapest capital available to a new investor, and it’s wildly underused. Buy a fourplex with an FHA loan at 3.5% down, live in one unit for 12 months, and rent the other three. Move out, repeat with a conventional loan at 5% down on the next property.
Two rules bite people here. FHA requires an owner-occupancy certification, and for three- and four-unit properties it applies a self-sufficiency test — 75% of the market rent from all units must cover the full mortgage payment. Conventional loans on multi-unit properties also require reserves that scale with the unit count.
HELOCs and portfolio loans: flexibility with strings
A home equity line of credit on your primary residence is one of the fastest ways to fund a down payment without selling anything. Most lenders cap the combined loan-to-value around 80% to 90%, and you’ll pay a variable rate — currently in the 8% to 9% range for many borrowers — but you only draw what you need.
Portfolio loans come from community banks and credit unions that keep the loan on their own books. They’ll look at the whole picture: your rental history, your local market, your relationship with the bank. In exchange you might get better terms on a property that doesn’t fit agency guidelines, or a blanket loan covering five houses under a single note. Regional banks vary enormously in appetite for investor debt, so it pays to understand how a bank prices and structures its mortgage programs before you walk into a branch.
Commercial loans for five units and up
Cross the five-unit threshold and you leave residential lending behind. Commercial mortgages typically run 5 to 10 years with 25- or 30-year amortization, which means a balloon payment at the end. Rates sit 1% to 2% above conventional, lenders want a DSCR of 1.20 or better, and prepayment is often locked down with yield maintenance or defeasance.
Recourse versus non-recourse matters more here. A non-recourse loan limits your personal exposure to the property itself, but you’ll pay for the privilege and sign a carve-out guaranty covering fraud and environmental issues.
Matching the loan to the exit strategy
Work backwards from how the deal ends, not from the lowest advertised rate.
- Fix and flip: hard money in, sell in five months, no prepayment penalty matters more than rate
- BRRRR: hard money or bridge for the purchase and rehab, DSCR refinance after seasoning
- Long-term buy and hold: conventional first, DSCR once you hit the 10-property cap
- Short-term rental: DSCR using projected Airbnb income, or conventional if your DTI can absorb the vacancy
- Value-add small multifamily: portfolio or commercial debt, since agency loans won’t fund heavy renovation
Keep one number in your head through all of this: the all-in cost of capital over the life of the deal. A 7.9% DSCR loan with a three-year prepay penalty can be cheaper than a 6.9% conventional loan that forces you to hold $30,000 in reserves you’d rather deploy on the next acquisition.
Before you sign anything, ask every lender three questions in writing. What’s the prepayment penalty, and how does it decline? What reserves do you require after closing, and can gift or business funds count? And what happens if I want to refinance or add a partner in the next 24 months? The answers separate a lender who funds investors from one who occasionally tolerates them — and that distinction will shape your portfolio long after the closing table is cleared.