Investment Property Mortgage: Rates, Requirements, and Down Payment
Financing an investment property is deliberately harder than financing your primary residence. Lenders price the loan higher — roughly 0.5% to 0.875% above a comparable primary-residence rate — and require more cash at closing, larger reserves, and a stricter debt-to-income cap. In exchange, you can use 75% of the property's expected rent toward qualifying under Fannie Mae's B3-3.1-08 rental-income rule, which is the single most important underwriting fact most investor guides bury. This guide walks the requirements: down payment by unit count, credit and reserve thresholds, how rental income is counted, when a DSCR loan beats a conventional, and a worked cost example on a $400K single-family rental.
Key Takeaways
- Investment property rates run roughly 0.5%–0.875% higher than primary-residence rates for the same borrower and credit score, driven by Fannie Mae Loan-Level Price Adjustments on non-owner-occupied loans.
- Conventional down payment minimums: 15% for a single-unit, 25% for a 2–4 unit non-owner-occupied property. FHA and VA are available on 2–4 unit properties only if the borrower occupies one of the units.
- Lenders count 75% of gross rental income toward qualifying (Fannie Mae B3-3.1-08 / Freddie Mac 5306.1). The 25% haircut covers vacancy, repairs, and management.
- Expect to document 6 months of PITI in reserves for each financed investment property, and Fannie Mae caps a single borrower at 10 financed properties total.
- If W-2 documentation is thin, a DSCR loan (debt service coverage ratio, typically ≥ 1.0–1.25) qualifies you on the property's cash flow instead of your personal income — at a rate premium of roughly 1%–2% over conventional.
Investment Property vs. Primary Residence vs. Second Home
Occupancy classification drives every downstream underwriting decision — rate, down payment, rental-income treatment, and program eligibility. A "second home" sits between primary and investment: it must be a reasonable distance from the primary residence, available for personal use year-round, and cannot be under a rental management agreement.
| Factor | Primary Residence | Second Home | Investment Property |
|---|---|---|---|
| Rate premium vs. primary | — | ~0.125%–0.25% higher | ~0.5%–0.875% higher |
| Minimum down (conventional) | 3%–5% | 10% | 15% (1-unit) / 25% (2–4 unit) |
| Rental income to qualify | No | No | Yes (75% rule) |
| FHA / VA eligibility | Yes | No | Only if owner-occupies one unit of a 2–4 |
| Cash reserves required | 0–2 months PITI | 2 months PITI | 6 months PITI per financed property |
Lenders verify occupancy at closing and can call the loan due for misrepresentation — occupancy fraud is a federal offense, not a workaround.
How Investment Property Mortgage Rates Compare to Primary Residence
The rate premium is not lender preference — it is baked into agency pricing. Fannie Mae and Freddie Mac charge Loan-Level Price Adjustments (LLPAs) on non-owner-occupied loans that scale with LTV and credit score. At 75% LTV and 740 FICO, the LLPA stack adds roughly 2.125 to 3.375 points in fee, which lenders convert into rate — translating to roughly 0.5% to 0.875% higher on a 30-year fixed than the same borrower would see on a primary. On a $300,000 loan, 7.5% versus 8.0% costs about $110/mo more and roughly $40,000 more in total interest over 30 years. For the underlying mechanics of what drives your quoted rate, see how mortgage rates are set.
Three factors push investment rates further above the primary headline: higher LTV (going from 25% down to 20% adds another 0.25%–0.5%), lower FICO (a 680 borrower pays 0.375%–0.625% more than 740 at the same LTV), and cash-out refinances (largest LLPAs on the sheet — often 3.75+ points at 70% LTV).
Down Payment Requirements by Unit Count
The down payment splits by unit count and by whether the borrower will occupy one of the units. The FHA/VA owner-occupancy carve-out on 2–4 unit properties is the most under-covered move in the beginning-investor playbook.
| Property type | Program | Minimum down | Notes |
|---|---|---|---|
| 1-unit, non-owner-occupied | Conventional (Fannie/Freddie) | 15% | PMI often unavailable — expect 20% in practice |
| 2–4 unit, non-owner-occupied | Conventional | 25% | LLPAs increase materially below 25% down |
| 2–4 unit, owner-occupied (one unit) | FHA | 3.5% | Borrower must occupy 1 unit (HUD Handbook 4000.1) |
| 2–4 unit, owner-occupied (one unit) | VA (eligible veteran) | 0% | Occupancy required; other-unit rental income may count |
| 1-unit, non-owner-occupied | DSCR (non-QM) | 20%–25% | Qualifies on property cash flow, not borrower income |
PMI is functionally unavailable on non-owner-occupied loans. Conventional loans require PMI if under 20% down on primary residences — but most PMI providers will not insure investment loans below 20% down. The "15% minimum" on 1-unit investments is theoretical for most borrowers; 20%–25% is the practical floor.
FHA and VA carve-outs are the beginner's superpower. A first-time investor who lives in one unit of a duplex, triplex, or quadplex can buy a rental with 3.5% down (FHA) or 0% down (VA) — a leverage advantage no pure-investor product matches. Trade: you must occupy for at least 12 months, and 3–4 unit FHA loans require a self-sufficiency test where 75% of market rents must cover full PITI. Duplexes are exempt.
Dollar amounts scale off your property's appraised value, not purchase price. If you're pulling the down payment from equity in another home, tap equity via a HELOC. See no-money-down options for owner-occupants for the FHA/VA playbook.
Qualifying With Rental Income (the 75% Rule)
Under Fannie Mae Selling Guide B3-3.1-08, lenders count 75% of gross rental income toward qualifying — the 25% haircut is a standardized allowance for vacancy, repairs, and management. Freddie Mac uses parallel treatment under Section 5306.1. The rule lets rental income offset the new PITI on your DTI; without it, the new payment would land on top of existing debts.
Acceptable documentation: signed lease on a tenanted property (strongest), the appraiser's Form 1007 rent schedule for vacant properties, or prior-year Schedule E for properties owned and rented at least a year.
How the math works. If gross rent is $2,400/mo and PITI is $2,650/mo, the lender counts $1,800 (75% of $2,400) as offsetting income. Net effect on DTI: $2,650 − $1,800 = $850/mo added to the borrower's debt column — that's the number that feeds into your debt-to-income ratio, not the full $2,650. If PITI exceeds 75% of rent, the shortfall is added to debts.
Credit, DTI, and Cash Reserve Requirements
Investment property underwriting is stricter on every dimension.
Credit score. Fannie Mae's floor is 620 FICO, and conventional loan credit score minimum is usually 620+ as a baseline. Lender overlays on non-owner-occupied loans push the practical minimum to 680–700, and the best LLPA tiers start at 740.
DTI. Standard cap is 45% back-end with 75% of the subject property's rent counted. AUS can push to 50% with compensating factors.
Cash reserves. Fannie Mae requires 6 months of PITI in reserves on the subject property, plus 2 months per other financed property if you own 1–4 investment properties (6 months each at 5–10). Reserves must sit in the borrower's own accounts (60% haircut on non-retirement securities and vested retirement balances under 59½). Gift funds do not count.
Financed property cap. Fannie Mae limits a single borrower to 10 financed properties total (Selling Guide B2-2-03), inclusive of the primary. Above 10, investors use portfolio loans, blanket loans, or commercial multifamily (5+ unit) financing.
You can work with any licensed mortgage lender of your choosing, and investors typically shop 3–5 lenders — reserve flexibility and LLPA absorption vary materially. An assumable FHA or VA loan is underused in elevated-rate environments — if the seller carries an assumable at a below-market rate and you can qualify, the assumption can beat any new-purchase financing.
DSCR Loans: When Personal Income Won't Work
If your W-2 income is thin, you're self-employed with heavy write-downs, or you've maxed the 10-property Fannie cap, a Debt Service Coverage Ratio (DSCR) loan qualifies you on the property's cash flow instead. DSCR is a non-QM product (outside the qualified-mortgage safe harbor), which is why the rate premium exists.
Formula: DSCR = Gross Monthly Rent ÷ PITIA. Most lenders require DSCR ≥ 1.0 with best pricing at ≥ 1.25.
| Feature | Conventional | DSCR (non-QM) |
|---|---|---|
| Income docs | 2 yrs W-2 or Schedule E + returns | None |
| Ratio | DTI ≤ 45% (with 75% rental offset) | DSCR ≥ 1.0–1.25 |
| Rate premium vs. primary | +0.5% to +0.875% | +1.0% to +2.0% |
| Minimum down | 15% (1-unit) / 25% (2–4) | 20%–25% |
| Property cap | 10 total financed | Typically none |
| Best for | Documentable-income investors under 10 properties | Self-employed, 10+ properties |
DSCR is the natural fit for self-employed borrowers documenting income with heavy Schedule C deductions that suppress qualifying income on paper. Expect closing costs 1%–2% higher than conventional and a prepayment penalty (typically 3–5 years) — read the note before signing.
Worked Cost Example: $400K Single-Family Rental
Assumptions: $400,000 purchase price, 25% down, 7.5% rate on 30-year fixed, $2,400/month market rent (verified by lease or Form 1007).
| Line | Calculation | Amount |
|---|---|---|
| Purchase price | — | $400,000 |
| Down payment (25%) | $400,000 × 25% | $100,000 |
| Loan amount | $400,000 − $100,000 | $300,000 |
| Principal + interest (7.5%, 30 yr) | Standard amortization | ~$2,097/mo |
| Property taxes (est. 1.2% of value) | $4,800 ÷ 12 | $400/mo |
| Insurance (landlord policy) | Est. | $110/mo |
| PITI subtotal | ~$2,607/mo | |
| Gross monthly rent | Lease or Form 1007 | $2,400/mo |
| Rental credit (75% rule) | $2,400 × 75% | $1,800/mo |
| Net DTI impact | $2,607 − $1,800 | ~$807/mo |
| Cash reserves required | 6 × $2,607 | ~$15,642 |
| Closing costs on the purchase (~3%) | $300,000 × 3% | ~$9,000 |
| Total cash to close + reserves | Down + closing + reserves | ~$124,642 |
Reading the example. The property runs slightly negative on paper ($2,607 PITI − $2,400 rent = $207/mo shortfall), but only adds $807/mo to DTI because 75% of rent offsets PITI. A borrower earning $10,000/mo gross with $2,000/mo of other debt lands at ($2,000 + $807) / $10,000 = 28% DTI, well inside the 45% cap. The ~$15,642 in reserves sits in the borrower's accounts through closing. Total upfront cash of ~$124,642 (down + closing + reserves) is the real threshold, not the $100,000 down-payment headline.
Mortgage interest on an investment property is deducted on Schedule E (rental expense), not Schedule A — a materially different tax mechanic than the mortgage interest deduction on a primary residence. Depreciation, deductible expenses, and passive-activity rules are covered in IRS Publication 527. Walk this through with a CPA.
How Opendoor Fits the Investment Property Purchase
Opendoor Home Loans currently originates loans for owner-occupied purchases in Denver and Colorado Springs only and does not offer non-owner-occupied investment property mortgages. Understanding your home equity picture — what your existing home is worth and how much cash you can pull via refinance or HELOC to fund the next purchase — is often the biggest lever an investor has. Shop at least 3 licensed lenders for investment financing; LLPA absorption, reserve overlays, and DSCR availability vary materially between shops.
Disclosure
Opendoor Home Loans LLC. Products, programs, rates, and terms are subject to change without notice and may not be available in all markets. Opendoor Home Loans currently originates loans for owner-occupied purchases in Denver and Colorado Springs only and does not offer non-owner-occupied investment property mortgages. This material is provided for informational purposes only and is not an offer or guarantee of credit. All rate examples in this article are illustrative; verify current rates at freddiemac.com/pmms or with a licensed lender. Consult a licensed mortgage professional and a tax advisor before making a decision that involves your specific financial situation.
