What Borrowers Should Know About Investment Property Loan Rates

Navigating the world of investment property loans can be both exciting and challenging for real estate investors. Whether you’re a seasoned property mogul or a first-time investor, understanding the intricacies of these specialized mortgages is crucial for success in the real estate market. 

In this comprehensive guide, we’ll explore the ins and outs of investment property loans, including their definition, types, and various loan options available. We’ll delve into the pros and cons of these financial instruments, explain investment property loan rates, discuss where to obtain them, and examine how they differ from traditional home loans. 

From conforming and non-conforming loans to jumbo and government-backed programs, we’ll cover the diverse range of financing options tailored to different investment strategies. By the end of this post, you’ll be well-equipped to make informed decisions about financing your next real estate investment venture.

What is an Investment Property Loan?

An investment property loan is a mortgage specifically designed for purchasing or refinancing properties intended for investment purposes. Investment property loan rates tend to be higher compared to primary residence mortgages due to the increased risk perceived by lenders. 

Investment properties fall into three main categories: residential (such as single-family homes or multi-unit buildings), commercial (like office spaces or retail units), and land (undeveloped property for future development).

Investment properties are not primary residences and are used to generate income through rentals, increase in value over time, fix-and-flip strategies, or short-term rentals.

Investment Property Loan Options 

• Non-QM Loans: Non-QM loans include bank statement loans, DSCR loans, construction loans, foreign national loans, non-traditional loans that don’t require traditional income verification methods.
• Conventional Loans: Conventional loans follow basic Fannie Mae and Freddie Mac standards and are suitable for many investment strategies.
• Government-Backed Loans: While less common for investment properties, some government-backed FHA and VA loans may be used for certain investment scenarios, though they’re generally less suitable for all investment strategies.
• Jumbo Loans: Jumbo loans are for high-priced properties and typically have stricter requirements and larger asset requirements.

Who Would Be a Good Candidate for an Investment Property Loan? 

• Real estate investors (seasoned and novice)
• Individuals looking to purchase a short-term rental property
• Property developers
• Landlords
• Foreign nationals looking to invest in US property
• First-time homebuyers looking to buy an investment property
• Self-employed individuals looking to purchase an investment property 

Current Investment Property Loan Rates

Investment property loan rates are generally higher than those for primary residences, reflecting the increased risk lenders associate with these loans. Investment property loan rates can vary based on several factors, including the borrower’s creditworthiness, the property type, and current market conditions. Typically, investment property loan rates may be 0.5% to 0.75% higher than rates for owner-occupied homes.

Determinants of Investment Property Loan Rates

It’s important to note that personal finances are considered much more heavily for investment properties than for primary residences.

• Lender Policies: Each lender sets its own investment property loan rates based on risk assessment and market conditions.
• Fannie Mae and Freddie Mac guidelines: These institutions charge higher fees for investment properties, which translates to higher interest rates for borrowers.
• Credit Score: A higher credit score generally results in lower interest rates, as it indicates lower risk to the lender.
• DTI Ratio: A lower debt-to-income ratio can lead to better rates, as it suggests the borrower has a better ability to manage payments.
• Cash Reserves: Having significant cash reserves is important for covering closing costs and initial mortgage payments, potentially leading to more favorable rates.
• Property LTV: A lower loan-to-value ratio typically results in better rates, as it represents less risk for the lender.
• Income Generation: Properties with a strong history of income generation may qualify for better rates.

Investment Property Loan Parameters

There are some general parameters in place for investment property loans:

• Down Payment: Most lenders require a down payment of 15-25% for investment properties, which is significantly higher than for conventional primary residence loans.
• Credit Score: Minimum credit score requirements are typically higher for investment properties. For example, Fannie Mae requires a minimum score of 620 for primary residences and 640 for investment properties.
• Cash Reserves: Lenders usually require borrowers to have substantial cash reserves to cover potential vacancies or repairs.
• Property Limits: For conforming loans (Fannie Mae/Freddie Mac), there’s a limit on the number of mortgaged properties a borrower can have.

At Defy Mortgage, we have multiple mortgage programs to assist borrowers with investment property loans. The requirements are as follows: 

DSCR Loans:

• 620+ FICO score
• 85% maximum LTV
• No maximum loan amount
• 0.75 Minimum DSCR ratio
• 3 months cash reserve
• Foreign nationals allowed
• Interest-only option available
• No income documents or tax returns required

Bank Statement Loans:

• 620+ FICO score
• 90% maximum LTV
• $6MM maximum loan amount
• 12-24 months of bank statements (personal and business accepted)
• Interest-only option available

Foreign National Loans:

• Good credit report/history from the U.S. or their home country. An International Credit Report may be necessary depending on the borrower’s U.S. credit history.
• Necessary documentation needed for pre-approval
• Ability to pay down payment (usually between 20% and 30% of the property purchase price)
• Verifiable income with consistent work history: includes two years of job history or income statements
• Liquid cash reserves to cover closing costs and mortgage payments.

Interest-Only Loans:

• 620+ FICO score
• 85% maximum LTV
• $10MM maximum loan amount
• 15% down payment, but no requirement for a principal paydown

Construction Loans:

• 620+ FICO score
• 85% maximum LTC
• 70% maximum ARV (as completed value)
• $10MM maximum loan amount
• Available for ground-up construction, fix-and-hold, and fix-and-flip, up to 4-unit properties

Fix-and-Flip Loans:

• 620+ FICO score
• 90% maximum LTC
• 70% maximum ARV (as completed value)
• Available for 1-4 unit investment properties
• Fixed interest rates with interest-only during construction phase

Profit and Loss (P&L) Loans 

• 600+ FICO score
• 90% maximum LTV
• $6MM maximum loan amount
• Borrowers must be self-employed for two (2) years and business must have existed for two (2) years
• CPA-prepared and signed profit and loss statement (P&L statement)
• 30-year fixed, adjustable, interest-only options

Interest-Only Loans

• 620+ FICO score
• 85% maximum LTV
• $10MM maximum loan amount
• 15% down payment, but no requirement for a principal paydown

Pros and Cons of Investment Property Loans

Pros of Investment Property Loans: 

• Opportunity to generate passive income through rental properties
• Potential for property value appreciation over time
• Tax benefits associated with owning investment properties
• Non-QM options are often easier to qualify for
• Ability to diversify investment portfolio beyond traditional stocks and bonds

Cons of Investment Property Loans: 

• Higher investment property loan interest rates compared to primary residence mortgages
• Larger down payment requirements, typically 15-25% of the purchase price
• Stricter qualification criteria, including higher credit score and income requirements

Investment Property Loans vs Primary Residence Loans

• Investment property loan rates are generally higher than primary residence loan rates by 0.5% to 0.75% due to increased perceived risk
• Investment property loans require larger down payments than primary residence loans, typically 15-25% vs. 3-20% for primary residences
• Investment property loans have higher minimum credit score requirements in comparison to primary residence loans (e.g., 640 vs. 620 for Fannie Mae loans)
• Investment property loans come with stricter overall requirements versus primary residence loans, including income verification and cash reserves

Minimizing Investment Property Mortgage Rates

• Down Payment: Make a higher down payment to reduce the loan-to-value ratio and potentially secure better rates.
• Credit Score: Improve your credit score to demonstrate lower risk to lenders.
• Debt: Reduce overall debt to improve your debt-to-income ratio.
• Options: Shop around and compare offers from multiple lenders to find the best available rates.

Investment Property Mortgage Lenders

1. Defy Mortgage

Defy Mortgage is bringing some bold, innovative energy to the mortgage game for non-traditional borrowers. Their experienced team specializes in helping real estate investors build their empire and establish their legacy with tailored loan solutions customized to meet each investor’s unique needs. They break down barriers for both buying and refinancing, making the process smoother and more secure. 

That cookie-cutter, one-size-fits-all approach? Not their style. Defy knows that access to the right mortgage can make or break a project. They’ve seen firsthand that the banks are rigid – many of Defy’s employees worked there for years. It’s why Defy was started – they are driven by a passion to challenge the status quo and create a new era of lending that puts the power in the hands of borrowers. Talk about setting new standards in the industry. 

Defy’s CEO, Todd Orlando, is an experienced banker who isn’t afraid of defying the traditional in the financial services space. Recognizing that the number of self-employed individuals is at an all-time high, Defy offers 75+ creative loan programs to help non-traditional borrowers achieve their goals – and that includes DSCR, fix & flip loans, construction loans and more. And the best part? They close fast and make it easy. 

2. PennyMac 

PennyMac is a direct lender that offers a variety of investment property loan options, including conventional and jumbo loans. They have a strong online presence and provide tools to help investors calculate potential returns on their investments.

PennyMac is known for its competitive investment property loan rates and fees. They also offer a digital application process and have received positive reviews for their customer service and loan processing efficiency.

3. LendingOne 

LendingOne specializes in investment property loans, offering products tailored specifically for real estate investors. They provide options for both long-term rentals and fix-and-flip properties, including bridge loans and rental loans.

LendingOne’s focus on investment properties means they understand the unique needs of real estate investors. They offer competitive rates and terms, and their experience in the investment property space can be valuable for both novice and experienced investors.

4. New American Funding 

New American Funding is a family-owned mortgage lender that offers a range of investment property loan options. They are known for their manual underwriting process, which can be beneficial for investors with unique financial situations.

New American Funding provides personalized service and has experience working with diverse borrowers. They offer competitive investment property loan rates and have received positive reviews for their customer service and ability to close loans efficiently.

5. Quicken Loans 

Quicken Loans, now operating under Rocket Mortgage, is one of the largest mortgage lenders in the United States. They offer a variety of loan options for investment properties, including conventional and jumbo loans. Their online platform makes it easy for investors to explore investment property loan rates and apply for loans.

Quicken Loans is known for its excellent customer service and streamlined digital application process. They also offer rate locks and have a reputation for closing loans quickly, which can be advantageous in competitive real estate markets.

Choosing the Right Investment Property Mortgage Lender 

• Get Your Finances In Order: Organize your financial documents and improve your credit score before applying.
• Research Lenders: Compare rates, terms, and customer reviews from multiple lenders specializing in investment properties.
• Understand Loan Types: Familiarize yourself with different loan options to choose the best fit for your investment strategy.
• Ask Questions: Don’t hesitate to inquire about fees, terms, and the lender’s experience with investment properties.
• Utilize Online Calculators: Use mortgage calculators to estimate payments and compare different loan scenarios.
• Negotiate: Don’t be afraid to negotiate investment property loan rates and terms with lenders.
• Lock In Your Rate: Once you find a favorable rate, consider locking it in to protect against market fluctuations.

Investment Property Loan Rates FAQs

1. What is an investment property loan? 

An investment property loan is a type of mortgage designed for individuals or entities looking to purchase real estate for investment purposes rather than as a primary residence. These properties generally fall into three main categories: residential, commercial, and undeveloped land. Investors can choose from a variety of loan options to finance these properties, including conforming loans, non-conforming loans, jumbo loans, and government-backed programs.

2. Who are investment property loans for?

Investment property loans are great for real estate investors, property developers, landlords (both short-term and long-term), foreign nationals, and individuals looking to purchase property for investment purposes.

3. What are the current investment property loan rates?

Current investment property loan rates vary by lender and borrower qualifications but are generally 0.5% to 0.75% higher than primary residence rates.

4. Which factors impact investment property mortgage rates?

Factors impacting investment property loan rates include credit score, down payment, debt-to-income ratio, property type, loan-to-value ratio, and overall market conditions.

5. What are the parameters for an investment property mortgage?

Parameters for investment property mortgages typically include higher down payments (15-25%), higher credit score requirements, and stricter income and cash reserve requirements compared to primary residence loans.

6. How much does my down payment need to be for an investment property loan?

Down payments for investment property loans usually range from 15% to 25%, depending on the lender and loan program.

7. What are the pros and cons of investment property loans?

Pros include potential for passive income and property appreciation; cons include higher rates, larger down payments, and stricter qualification requirements.

8. Are investment property loan rates higher than residential mortgage rates?

Yes, investment property loan rates are generally higher than residential mortgage rates by about 0.5% to 0.75%.

9. How can I minimize my investment property loan rate?

To minimize your investment property loan rate, make a larger down payment, improve your credit score, reduce overall debt, and shop around for the best offers.

10. Where can I get an investment property loan?

Investment property loans are available from various sources, including traditional banks, online lenders, credit unions, and specialized investment property lenders.

11. How should I choose an investment property mortgage lender?

Choose a mortgage lender by comparing investment property loan rates and terms, considering their experience with investment loans, and evaluating their customer service and closing efficiency.

12. Are investment property loans QM or Non-QM?

Investment property loans can be either QM or Non-QM, depending on the specific loan program and lender.

13. Is it possible to put zero-down on an investment property loan?

Zero-down investment property loans are extremely rare; most lenders require at least 15-25% down payment for investment properties.

14. Can investment property borrowers refinance their properties?

Yes, investment property borrowers can refinance their properties, potentially to lower their interest rate, change loan terms, or access equity.

15. Is Defy Mortgage licensed to do investment property loans?

Yes, Defy Mortgage is licensed to do investment property loans.