Investment Property Loans: What You Should Know Before Getting Started

August 7, 2023

Are you considering real estate investing with the intention of renting it out or utilizing it as a vacation rental for travelers? Investing in real estate can become a reliable income stream however, it can be challenging. Are you ready to take on the role of a real estate investor?  


Investing in real estate can be a lucrative venture, but it often requires capital upfront. For many investors, obtaining an investment property loan is the key to unlocking the potential of real estate investments. However, investment property mortgages are typically higher than what you would pay for a primary home, and the requirements are a little bit different from traditional requirements.


Understanding Investment Property Loans

An investment property loan or rental property loan is a type of mortgage used to finance the purchase or refinance of a property that is intended for investment purposes rather than being used as the borrower’s primary residence. These loans are specifically designed to help real estate investors acquire properties that will generate rental income or appreciate in value over time.


What is an Investment Property?

An investment property is a real estate property that is acquired with the primary purpose of generating a return on investment (ROI) through rental income, capital appreciation, or both. Unlike a primary residence that is bought for personal use, an investment property is purchased with the intention of earning a profit or building wealth through the property’s performance in the real estate market. Investment properties can apply to:  

· Single Family Homes

· Multi-Family Homes

· Multi-Units

· Condominiums

·  1-4 Units

·  Townhomes

·  Commercial Properties


Types of Investment Property Loans

 Long-Term Rental Loan. A long-term rental loan, also known as a rental property loan, is a type of financing specifically designed for real estate investors who plan to purchase and hold residential properties or commercial properties as rental investments. These loans are meant to provide investors with the necessary funds to acquire income-generating properties that will be rented out to tenants for an extended period.

Short-Term Rental Loan. A short-term rental loan, also known as an Airbnb loan, is a type of financing designed specifically for real estate investors who plan to purchase or refinance properties used as short-term vacation rentals or Airbnb-style accommodations. These loans cater to investors looking to capitalize on the growing popularity of short-term rental platforms by acquiring properties that can generate rental income on a short-term basis, typically ranging from a few days to a few weeks.

Fix & Flip Loan. A fix and flip loan is a type of short-term financing designed for real estate investors who plan to purchase properties, renovate or “fix” them, and quickly sell or “flip” them for a profit. These loans are commonly used by investors whose goal is to buy distressed or undervalued properties, improve their condition, and sell them at a higher price.

Eligibility and Qualification

To qualify for an investment property loan, lenders will evaluate your credit score, down payment, and the potential cash flow of the property you intend to purchase.

 Down Payment Requirements. Compared to primary residence loans, investment property loans typically require higher down payments. Generally, a down payment of 20% to 25% of the property’s purchase price is standard. A larger down payment can also lead to more favorable loan terms and lower interest rates.

 Credit Score Requirements. You’ll need a minimum score of 660 for qualify for an investment property mortgage.

 Using Rental Income to Qualify. Using potential rental income to qualify for an investment property loan is a common practice in real estate financing. The potential rental income refers to the expected income that the property is projected to generate from future tenants once it is fully occupied or at market rental rates.

 Cash Reserves. Cash reserves are liquid assets, typically held in a bank account. The borrower will need to have a few months’ worth of mortgage payments (principal, interest, taxes, and insurance)that the borrower must have in reserves. It is required for the borrower to have at least two to six months’ worth of mortgage payments in addition to their down payment and closing costs in their bank account.


How to Get an Investment Property Loan?

The process for getting an investment property loan requires a few steps.

FILL OUT A LOAN APPLICATION. Complete the loan application. Once your offer is accepted, formally apply for an investment property loan. A credit check will be required to assess your creditworthiness and credit history.

PAY FOR AN APPRAISAL. An appraisal will be ordered on the property to determine its market value. The appraiser will evaluate the property’s condition, location, and rent comparable in the area to assess its worth.

UNDERWRITING. The underwriting process is a critical stage where an underwriter evaluates your loan application and supporting documents. The underwriter analyzes your credit history, property details, and other relevant factors to assess the level of risk associated with the loan.

FUNDING.  During the funding process, all loan documents will be signed and remaining closing costs and fees must be paid. The loan proceeds will be disbursed to complete the purchase or refinance of the property.


Investment Property Mortgage Rates and Terms

Interest rates for investment property loans are typically higher than those for primary home loans. This is because investment properties are considered riskier investments. Interest rates can vary based on the loan type and the borrower’s creditworthiness. Your credit score and down payment substantially influence the rate you’ll be offered.  


Get on The Path to Owning an Investment Property

Are you prepared to harness the advantages of real estate investing? If your answer is yes, then it’s the opportune moment to start researching properties in your area. There are additional factors to consider whether you are ready or not. Evaluate your financial stability and determine if you are prepared to manage an investment property. You will also need to take into consideration the current market conditions, property taxes, and whether you want to personally handle the property or if you’d rather hire a property management company.


If you decide you are ready and would like to move forward with buying an investment property, then take the next step with We can help you get the perfect financing catered to your financial situation. Get Approved with and you’ll be on your way to getting into your first investment property.

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8/4/23 9:50 pm


8/4/23 9:50 pm