Listing remarks
- Fannie Mae allows a borrower up to 10 financed properties when the new loan is for a second home or investment property.
- Fannie Mae lets lenders use positive rental income to qualify only if the borrower has at least 12 months of property management experience.
- FHA can insure a 1- to 4-family home only if the borrower will live there, with at least 3.5 percent down.
The loan is often the biggest variable in a rental purchase. It sets how much cash you need, how much the property must earn and how much room you have when something goes wrong. Most residential mortgages in the United States follow the rules of Fannie Mae or Freddie Mac, or the FHA for government-insured loans. This guide uses Fannie Mae’s published Selling Guide and federal law to explain what changes when the property is an investment.
Occupancy decides almost everything
Fannie Mae sorts every loan by how the borrower will use the property: principal residence, second home or investment property. A principal residence is where the borrower lives. An investment property is owned but not occupied by the borrower. A second home must be a one-unit home the borrower uses for part of the year, and it cannot be rental property.
Occupancy is not a box to tick loosely. The loan documents state how you will use the property, and the pricing, down payment and reserve rules follow from that answer.
What changes for an investment property
| Topic | Principal residence (1 unit) | Investment property |
|---|---|---|
| Pricing | Standard | An extra loan-level price adjustment applies to every loan |
| Underwriting | Automated or manual | Must receive an Approve/Eligible in Fannie Mae’s DU system (with narrow exceptions) |
| Minimum reserves in DU | None required | Six months, plus more for other financed properties |
| Number of financed properties | No limit (other than HomeReady) | Up to 10 |
Source: Fannie Mae Selling Guide sections B2-1.1-01, B2-2-03 and B3-4.1-01. The maximum loan-to-value ratio, and so the minimum down payment, for each occupancy type is set in Fannie Mae’s Eligibility Matrix, which changes over time; ask your lender for the current figure.
Reserves: cash after closing
Reserves are measured in months of the full payment: principal, interest, taxes, insurance and association dues. Fannie Mae’s automated underwriting generally requires six months of reserves for an investment property purchase and for a two- to four-unit principal residence. Acceptable sources include checking and savings, stocks, bonds and mutual funds, and the vested part of a retirement account. Personal unsecured loans and cash from a cash-out refinance of the same property do not count.
If you own other financed properties, additional reserves are required when the new loan is for a second home or an investment property.
How many properties you can finance
For a second home or investment property, Fannie Mae allows up to 10 financed properties per borrower. The count includes every one- to four-unit residential property on which you are personally obligated, including your own home if it has a mortgage. A two-unit building counts as one property. Commercial property, buildings with more than four units, timeshares and vacant lots do not count toward the limit.
Counting rental income
Many beginners assume the future rent will help them qualify. The rules are narrower than that:
- Rental income is acceptable if it is likely to continue.
- Lenders may use positive rental income to qualify only if the borrower has at least 12 months of property management experience, documented through tax returns or leases.
- Without that experience, rental income can only offset the payment on the property itself.
- A newly signed lease on a property not yet on your tax return generally needs a term of at least six months.
- Rent from your own home, including the unit you live in within a two- to four-unit building, generally cannot be used to qualify, with limited exceptions such as accessory units.
Tip: Keep clean records from day one: signed leases, rent deposits that match them and a complete Schedule E. Lenders will ask for them when you buy your next property.
The FHA route: buy it and live in it
The National Housing Act allows FHA to insure a mortgage on a 1- to 4-family dwelling only if the borrower will occupy it as a principal residence or, in limited cases, a secondary residence. The minimum cash investment is 3.5 percent of the appraised value. That makes FHA a common way to buy a duplex, triplex or fourplex as your first property and rent the other units. FHA loans carry mortgage insurance premiums, and HUD sets loan limits by area and number of units. See House Hacking a Duplex: Living in One Unit, Renting the Others.
Questions to ask a lender
- What is your current minimum down payment for this occupancy type and number of units?
- How much will the investment property price adjustment add to the rate or cost?
- How many months of reserves will I need, counting my other properties?
- How will you count the rent from this property, given my experience?
- Do you require an appraisal with a rent schedule?
The bottom line
An investment property loan costs more and asks for more cash than a loan on your own home. Plan for the down payment, closing costs and months of reserves, and do not count on future rent to qualify unless you already have a landlord track record. Then run the payment through Rental Property Math: Cash Flow, NOI and Cap Rate Explained to see whether the property still works.