Investment Property Loans: Requirements and Options

Buying a rental? Start your application to finance a rental with a conventional or jumbo investment loan. Herring Bank · NMLS #415783 · Equal Housing Lender

What Counts as an Investment Property (vs. Primary and Second Home)

Occupancy drives everything about the loan: down payment, rate, reserves and which income counts. Fannie Mae recognizes three occupancy types (B2-1.1-01):

A second home must be suitable for year-round use, under your exclusive control and not subject to a rental management agreement. A lake house you mostly rent out on short-term platforms through a manager is an investment property. Misstating occupancy to get a better rate is mortgage fraud.

Investment Property Loan Requirements: Down Payment, Credit, Reserves, DTI

Down payment

Gift funds generally can’t cover the down payment on an investment purchase. Your own money and reserves need to be documented. Loans above the 2026 conforming limit of $832,750 in most counties (FHFA) are jumbo loans, where the lender sets the down payment and reserve rules. For a jumbo rental, plan on at least 25% down.

Credit score

Fannie Mae has no fixed minimum score for loans approved through Desktop Underwriter (B3-5.1-01). Investment loans must receive a DU Approve/Eligible. In practice, lenders set their own floors, and scores below 700 bring steep price adjustments on rentals.

Reserves

Under Fannie Mae’s B3-4.1-01, DU requires six months of PITIA (principal, interest, taxes, insurance and association dues) for any investment property transaction. If you own other financed properties besides your home, add:

• 2% of the unpaid balances on those other properties if you have 1-4 financed properties
• 4% if you have 5-6
• 6% if you have 7-10

Checking, savings, brokerage and vested retirement funds count. Cash from a cash-out refinance of the same property does not.

Debt-to-income

Your DTI includes your own housing payment, your other debts and any net loss from rentals. Fannie Mae’s DU accepts DTIs up to 50% with strong files. Lender overlays vary.

Using Rental Income to Qualify

Rent helps you qualify, but not dollar for dollar. Fannie Mae’s rental income rules (B3-3.8-01 and B3-3.8-02) work like this:

• Purchase: The appraiser completes a rent schedule (Form 1007 for one unit, Form 1025 for 2-4 units). The lender takes 75% of monthly gross rent and subtracts the property’s PITIA. A positive result is income, and a negative result is a debt.
• Refinance or properties you already own: The lender uses Schedule E from your latest tax return, adding back depreciation, interest, taxes and insurance, to calculate income. A lease can be used instead in specific cases, such as a property bought after your last return was filed.
• Experience matters: Positive rental income can only be counted if you have at least 12 months of property management experience. First-time landlords can only use rent to offset the rental’s own payment.
• Your own home: Rent from a second home can’t be used to qualify.

Worked example: a single-family rental in Lubbock

Illustrative only, not a rate quote: $280,000 purchase, 20% down ($56,000), $224,000 loan at 7.25% for 30 years.

Required reserves would be about $13,308 (six months of PITIA), plus 2% of the balance on any other financed rental you own. Notice that a property can cash-flow on paper, since $2,100 rent is close to the payment, and still add to your DTI once the 25% factor is applied. Run your scenario through Herring’s mortgage payment calculator before you make an offer.

Why Investment Property Rates Are Higher

Rental loans default more often than owner-occupied loans when times get hard, because people protect the roof over their own heads first. Fannie Mae prices that risk through loan-level price adjustments (LLPAs). Under B2-1.1-01, “an LLPA applies to all mortgage loans secured by an investment property,” on top of the adjustments for credit score and LTV. The investment LLPA rises with LTV, from roughly 1.125% to more than 4% of the loan amount. Lenders usually turn that into a higher rate rather than charging it upfront, which is why rental rates commonly run above owner-occupied rates for the same borrower.

Ways to narrow the gap:

• Put 25% down instead of 15%. The LLPA drops at lower LTVs.
• Raise your score past the next tier (720, 740, 760) before applying.
• Compare paying points against taking a higher rate, based on how long you plan to hold.

Want to see your own pricing? Explore Herring Bank conventional loans for investment properties, or start an application for a personalized quote. NMLS #415783 · Equal Housing Lender

Loan Options: Conventional, Jumbo, DSCR, Hard Money and Bridge

Herring offers conventional and jumbo loans for investment properties. If you’re flipping or need speed over price, read our guides to hard money loans and bridge loans. DSCR loans are a non-QM product offered by specialty lenders. Compare their total cost with a conventional loan before choosing one.

Cash-Out Refinancing a Rental (and Why Texas Homestead Rules Don’t Apply)

Texas has the strictest home equity rules in the country. Article XVI, §50(a)(6) of the Texas Constitution caps cash-out loans at 80% of value, limits certain fees to 2%, requires a 12-day waiting period after the notice, and allows only one such loan a year. Those rules protect a homestead, the home you live in.

A rental isn’t your homestead, so a cash-out refinance on it is an ordinary non-homestead loan:

• LTV: Fannie Mae’s limits apply: 75% for one unit and 70% for 2-4 units. These are actually lower than Texas’s 80% homestead cap.
• No §50(a)(6) fee cap or 12-day notice. Standard federal disclosures still apply.
• Homestead status must be clear. If you once lived in the property or claimed a homestead exemption on it, the title company will want proof it is no longer your homestead, such as a removed exemption and a new primary residence. Lenders usually have you sign a non-homestead affidavit.

Example: a Fort Worth rental appraised at $360,000 with a $150,000 balance. At 75% LTV, the maximum new loan is $270,000. That leaves up to $120,000 before closing costs, which is cash you might put toward the next down payment. Learn more on Herring’s cash-out refinance page. For homestead cash-out, see cash-out refinance credit score requirements in Texas.

House Hacking: Buying a 2-4 Unit With FHA, VA or Conventional

If you live in one unit of a duplex, triplex or fourplex, the loan is a primary residence loan, and the down payment drops sharply:

• FHA: 3.5% down with a 580+ score on 1-4 units. Three- and four-unit properties must also pass HUD’s self-sufficiency test, under which net rental income must cover the mortgage payment (HUD 4000.1).
• VA: No down payment on up to four units for eligible veterans who will live in one unit, subject to entitlement and the lender’s rules.
• Conventional: Fannie Mae allows up to 95% LTV (5% down) on a 2-4 unit principal residence.

Example: a $400,000 Lubbock duplex with FHA. With 3.5% down ($14,000), the base loan is $386,000. Add the 1.75% upfront MIP and the loan is about $392,755. At an illustrative 6.25%, principal and interest is about $2,418 a month, plus about $180 a month in annual MIP at 0.55%. The rent from the other unit, counted at 75% of market rent, helps you qualify. Later, when you move out, the property becomes a rental without refinancing.