A duplex on Elm Street lists at $385,000 and rents for $1,650 per side. The buyer has $95,000 in cash, a strong W-2 income, and a pre-approval letter from the same loan officer who handled his own house. Then the numbers come back and the deal changes shape. The rate is 0.875% higher than his primary residence quote, the lender wants six months of reserves on the rental plus his own home, and the rent only counts at 75% of the lease. That gap between “I qualify” and “I qualify for this” is where investment property mortgage types start to matter.
Why an Investment Loan Isn’t Just a Pricier Mortgage
Lenders price risk, and a borrower who lives somewhere else is a borrower who can walk away from a payment without losing a roof. That single fact drives most of the differences between a rental loan and a home loan:
- Rate: typically 0.5% to 1.5% above primary residence pricing, with 0.75% as the common spread
- Down payment: 20% for a single-family rental, 25% for two to four units on conventional terms
- Reserves: six months of principal, interest, taxes, and insurance per financed property in many cases
- Rental income: counted at 75% of the lease or appraiser-determined market rent
- Credit: score floors run higher, usually 620 to 640 for conventional, 660 to 700 for DSCR
One thing worth getting straight early: a rental is not a second home, and lenders treat the two completely differently. If you plan to use the property yourself part of the year, read up on second home mortgage types before you let a loan officer label the file, because the wrong label is hard to unwind at closing.
The Main Investment Property Mortgage Types
Conventional Investment Loans (1–4 Units)
These are Fannie Mae and Freddie Mac loans on residential property, and they carry the best rates available to most landlords. You’ll need 20% down on a single-family rental and 25% on a two-to-four unit. The cap is 10 financed properties at Fannie Mae, and once you pass four, the reserve requirements climb to six months on every property you own. Rental income can offset your debt-to-income ratio, but only after a two-year landlord history or, on a new purchase, a lease plus the appraiser’s market rent opinion.
Property must generally vest in your personal name. Placing it in an LLC after closing is usually fine under the lender’s own servicing rules, but doing it before closing kills the deal. The trade-off between these and government-insured options is bigger than most people expect, which is why conventional versus government-backed mortgages is worth understanding before you shop.
DSCR Loans
Debt service coverage ratio loans qualify the property, not the person. The math is gross monthly rent divided by the full monthly payment (principal, interest, taxes, insurance, and HOA). Lenders want that ratio at 1.0 to 1.25, so a property bringing in $3,300 against a $2,750 payment clears at 1.20. At 1.0 you’re breaking even on paper and most lenders will charge you for it.
What makes DSCR loans useful: no tax returns, no DTI calculation, no W-2 verification, and LLC vesting allowed from day one. Down payments land at 20% to 25%, rates run roughly 0.5% to 1.5% above conventional, and prepayment penalties of five, four, three, two, one years are standard. Self-employed investors and anyone with a dozen properties often find this is the only door open to them.
Portfolio and Community Bank Loans
Small banks and credit unions that keep loans on their own balance sheet write their own rules. Expect 20% to 30% down, adjustable rates tied to prime, and a real conversation about your track record rather than a scorecard. Blanket loans that cross-collateralize several properties are common here, which simplifies management but ties your portfolio together if one property sours. These relationships are worth cultivating two or three deals before you need them.
Hard Money and Bridge Loans
Short-term money for properties that won’t qualify for permanent financing yet. Expect 65% to 75% of purchase price, 9% to 14% interest, and two to four points. Terms run 6 to 18 months, interest-only, with the exit being a sale or a refinance. This is fix-and-flip territory and heavy-rehab rentals. The refinance out of a bridge loan is a separate transaction with its own appraisal and seasoning rules, and the differences between a purchase mortgage and a refinance mortgage catch first-timers off guard.
House Hacking With FHA and VA Loans
The cheapest capital in residential real estate, if you’re willing to live in the building. FHA allows 3.5% down on up to four units, with a self-sufficiency rule requiring 75% of the rents to cover the payment on three and four unit properties. VA runs 0% down on up to four units for eligible borrowers. Both require you to move in within 60 days and occupy for at least a year. Primary residence mortgage types unlock pricing and down payment terms that investment loans simply don’t offer, and four units of rent can wipe out your housing payment entirely.
Commercial Mortgages (5+ Units)
Once you cross four units, you’re in commercial underwriting. Down payments of 25% to 35%, DSCR minimums around 1.20 to 1.25, five to ten year terms amortizing over 25 or 30 years, and a balloon payment at the end. Non-recourse structures exist for stronger deals. Mixed-use buildings with retail on the ground floor live here too, and lenders will apply their own rent assumptions to the commercial square footage.
Seller Financing and Assumable Loans
Not a bank product, but a real financing method. A seller carrying a 10% to 30% second mortgage can eliminate the need for mortgage insurance and shorten your path to closing. Assuming an existing FHA or VA loan is another route, though VA entitlement rules and lender approvals add friction.
How Lenders Actually Read Rental Income
This is where deals quietly die. On a property you already own, the lender pulls two years of Schedule E and adds back depreciation, a non-cash deduction that makes rental income look worse on your taxes than it does in your bank account. Then it applies a vacancy factor, commonly 25%, before counting anything toward your debt-to-income ratio.
On a new purchase, a signed lease plus the appraiser’s market rent opinion (form 1007) can substitute for landlord history. Fannie Mae will accept one year of landlord experience in some cases, but the two-year rule is the safe assumption. Those tax strategies that save you money in April can cost you an approval in June, and the timing of a large deduction is worth planning around.
Numbers That Change the Decision
On that $385,000 duplex with 25% down, you’re financing $288,750. At 7.5% over 30 years, principal and interest run about $2,019 monthly. Add $520 for taxes and insurance and the payment is roughly $2,540. Gross rent is $3,300, but the lender counts $2,475. The property doesn’t cover its own payment on paper, so the $405 shortfall comes out of your DTI, along with six months of reserves (about $15,240) held after closing. Cash to close lands near $112,000 once you add closing costs and lender reserves.
Run the same deal as a DSCR loan and the ratio comes in at 1.30 ($3,300 ÷ $2,540), which clears most lenders’ thresholds even with a higher rate. That’s the practical argument for the product: it underwrites the rent rather than the borrower’s tax returns.
Traps Worth Knowing Before You Sign
Prepayment penalties on DSCR and portfolio loans can cost six months of interest if you sell or refinance early. Adjustable-rate portfolio loans reset on schedule whether or not rents have kept up. Blanket loans make it hard to sell one property without renegotiating the whole package. Cash-out refinances on investment property usually require six months of seasoning and cap at 75% loan-to-value.
Credit is the other lever. A 640 score opens conventional investment financing; a 580 with 12 months of reserves often leads to DSCR or non-prime lenders instead. If your file is thin or bruised, home loans for bad credit covers which programs still say yes and at what price.
Match the Loan to How Long You’ll Hold
Exit strategy should pick the product, not the other way around. A flip needs hard money with a defined refinance or sale date. A buy-and-hold single-family rental belongs on a 30-year conventional loan so the payment stays fixed for decades. A self-employed investor with seven properties and clean books is a DSCR borrower. Someone buying a fourplex to live in one unit should exhaust FHA and VA options first, because nothing else comes close on down payment.
If you’re still narrowing it down, what type of mortgage should I get walks through a decision sequence that maps cleanly onto rental property. Bring the lender four things: the lease or market rent estimate, your last two tax returns, a list of every property you own with its mortgage balance, and a reserves statement. Those four documents determine which of these loan types you can actually qualify for, and getting them in front of a loan officer early beats discovering the shortfall three days before closing.