Conventional Loan for a Rental Property: Terms and Limits
A normal bank loan. The bank looks at your income and credit score. It usually has the best rate, but it takes longer to get approved and needs more paperwork.
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A conventional loan is a mortgage that conforms to Fannie Mae or Freddie Mac guidelines. It is the cheapest financing most investors can get, and it qualifies you on your personal income rather than the property's.
Investment-property terms
Conventional loans cost more and ask for more on a rental than on a home you live in:
| Primary residence | Investment property | |
|---|---|---|
| Minimum down | 3% – 5% | 15% (1 unit), 25% (2 – 4 units) |
| Rate premium | None | roughly 0.5% – 0.875% higher |
| Reserves | Often none | 2 – 6 months per property |
| Credit minimum | 620 | 640 – 680 in practice |
In practice most investors put 20% to 25% down, because 15% down triggers mortgage insurance on an investment property, which is expensive.
How you qualify
On your debt-to-income ratio: total monthly debt payments divided by gross monthly income, generally capped around 45% to 50%. Lenders will usually count 75% of the property's expected rent as income, the 25% haircut standing in for vacancy and management.
This is the mechanism that eventually stops conventional borrowers: each property adds debt, and rental income only partly offsets it.
The ten-property limit
Fannie and Freddie allow a maximum of ten financed properties per borrower. Beyond that you need portfolio, commercial or DSCR financing. Many investors hit a practical wall well before ten as DTI tightens.
The house-hacking exception
Buy a 2 – 4 unit property, live in one unit, and it is a primary residence: 3% to 5% down and no investment-property rate premium, while the other units pay the mortgage. It is the single cheapest way into small multifamily. See house hacking.
When to choose something else
Go conventional when you qualify; it is almost always the cheapest money. Look at a DSCR loan if you are self-employed with heavily deducted income, past the property limit, DTI-constrained, or not a US resident, in which case see foreign national loans.
Related reading
How much cash do you need covers the full cash requirement, and the financing options rundown compares the alternatives.
Longer reads on this
Related terms
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