Tips for Financing Investment Property

The biggest part of finding financing is knowing your investment property goals.

Ground Picture/Shutterstock

Investment properties are a great way to build wealth. But you’ll be successful at it only if you use the correct financing. There are various ways to borrow money to achieve your real estate investment goals.

From local banks to your home’s equity, you’ll find tips to find the funds needed to start earning through real estate.

Understanding Financing for Investment Properties

There’s a difference between financing a home and financing an investment property. It’s more difficult to finance an investment property because lenders consider them a higher risk. The result is stricter lending criteria and qualification requirements.

You’ll need to have a larger down payment and a higher qualifying credit score than a primary homeowner would need.

Investment property financing also requires increased interest rates. This is to offset the perceived extra risk.

But there is good news: According to The Mortgage Reports, lenders typically apply 75 percent of the future rental income to count toward your qualifying income. The lender will require a rental schedule or a current lease agreement. The appraiser will use this view of your rental income and base it on local comparisons with similar rental properties.

Finance Investment Property With a Conventional Loan

The federal government doesn’t insure conventional loans, so it has stricter qualification criteria. You’ll need a strong credit score. Credible states that although 620 or above is required, it really takes closer to 720.

A conventional loan requires at least a 3 percent down payment to qualify. The debt-to-income (DTI) ratio typically can be no more than 36 percent, although some will let you have a DTI ratio of up to 45 percent.

US Department of Veterans Affairs Loans

The VA multifamily loan is exclusively for eligible military borrowers. The program allows a veteran, or a co-borrower who’s a veteran, to buy a property with up to six residential units. The caveat is that the borrower must live in one of the units. There are also other requirements.

The building you are buying must meet stringent VA appraisal standards. You’ll need cash on hand for mortgage-reserve requirements. Past landlord experience is necessary to qualify using rental income.

But there are pros, such as not needing a down payment. You also won’t pay any mortgage insurance. Rental income can be used to qualify.

Nonqualified Loans

A nonqualifying mortgage, or non-QM loan, allows you to qualify for financing when you can’t provide either the income or documentation needed to qualify for other loans.

Non-QMs, however, don’t meet the Consumer Financial Protection Bureau’s requirement to be considered qualified mortgages. Because non-QM lenders exist outside the normal mortgage rules, they have a lot of freedom over who they can approve and what the features are for the loan.

But although that sounds great to the borrower when it comes to qualifying, it also means you could end up with expensive money. The high interest rate may cause financial strain.

Non-QMs sometimes don’t require a specific DTI ratio, and, instead of tax documents, may allow bank statements. With a qualified mortgage, you must wait up to seven years after declaring bankruptcy to receive financing. But a non-QM’s waiting period is one day.

The down payment for a non-QM is 10–25 percent, and there’s no limit to the number of financed properties it will finance.

Owner Financing

There are times when sellers will act as lenders. But with an owner-financing arrangement, you'll probably be required to make a balloon payment. This means you must pay off the entire balance within a short period of time. This could be anywhere from five to 10 years, according to LendingTree.

If you’re having a problem qualifying for a standard loan, five to 10 years may give you time to put your financial house in order. You can then qualify for a loan and pay the balloon payment.

Hard Money Loan

Hard money loans don’t originate with financial institutions. Instead, private parties or businesses lend you the money. The problem is that it needs to be paid off quickly. The usual timespan is five years.

This is a good deal if you have cash flow but don’t have a credit history or good credit. The loan is secured with the lender using the investment property as collateral. Therefore, no emphasis is placed on credit history.

This form of financing is often used by property flippers.

Private Funding From Individuals

Like a hard money loan, private funding often comes from individuals. A private lender focuses on the property value rather than the borrower’s creditworthiness. They can offer flexible terms and a faster approval process.

But you’ll pay a high interest rate and have shorter repayment terms. You’ll also be required to provide a large down payment.

Know Your Finance and Investment Goals

The biggest part of finding financing is knowing your investment property goals. Are you in it for the long haul, or are you going to sell quickly? If you plan on selling quickly, a shorter-term loan may work well for you.

Your overall personal finances will also dictate what type of financing you’ll qualify for. Speak to a financial adviser and explore what type of financing will work for your circumstances.

The Epoch Times copyright © 2025. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.