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You've found your first rental, and now a lender wants to know how you'll pay for it.
How do you finance it?
For most people - a conventional investment property loan is the correct route with 15% to 25% down, keeping six months of payments in reserve and a solid credit score.
- How much down? 15% on a single-family rental and 25% on a 2 to 4 unit property with a conventional loan.
- Does the rent help you qualify? Lenders count 75% of it, but first-time landlords can only use it to cover the new property's own payment.
- How much cash in total? About 25 to 30% of the price in our worked example, once closing costs, repairs and reserves are added.
Lenders see a rental as riskier than your own home. They assume that if money gets tight, you'll keep paying the mortgage on the home you live in first. That's why investment property loans ask for more cash, cost more and come with stricter checks.
If that's out of reach, a strategy called house hacking, where you live in one unit of a two to four unit property and rent out the rest, can help. Buying that way with an FHA (Federal Housing Administration) or VA (Department of Veterans Affairs) loan may reduce your down payment. DSCR (debt service coverage ratio) loans offer another route if your personal income doesn't meet conventional lending requirements.
What are your loan options for a first rental property?
The right loan depends on two things: whether you'll live in the property, and how much cash and income you have. Here's how the main options compare.
Understanding the different loan types available
Each loan type works differently and comes with its own catch. Here's how the five main mortgage options work and what to watch for.
The FHA self-sufficiency test trips up a lot of fourplex buyers, so check the numbers before you make an offer.
How does seller financing work?
With seller financing, the seller acts as the bank. You pay them a down payment, then monthly installments, often with a balloon payment after a few years.
It works best when the seller owns the property outright. An existing mortgage usually has a due-on-sale clause, which lets the seller's lender demand full repayment when the property is sold.
The down payment, rate and repayment schedule can be negotiated, subject to applicable law, which can limit how the loan is structured. Have a real estate attorney draft the promissory note and record the mortgage or deed of trust. Our guide to creative financing for real estate covers more options.
Can you use home equity for a rental down payment?
Yes. If you own your home and have equity in it, you can borrow against it to fund the down payment on a rental.
- HELOC: a home equity line of credit you draw on as needed.
- Cash-out refinance: a new, bigger mortgage on your home that pays you the difference, explained in our cash-out refinance guide.
Either way, your home is the collateral, so a rental that loses money puts your own home at risk.
How do hard money and private money loans work?
Hard money lenders are private companies that lend against the property's value, often its after-repair value (ARV), rather than your income. They can close in days, which helps at auction or on a property that won't qualify for a conventional loan until it's fixed.
The trade-off is cost: higher rates, upfront fees called points and short terms, often 6 to 24 months. Private money works the same way but comes from individuals, such as family, friends or other investors, on terms you agree between you.
Investors often pair these loans with the BRRRR method (buy, rehab, rent, refinance, repeat). You buy and renovate with short-term money, rent the property out, then refinance into a long-term loan to repay the lender.
It only works if the property appraises high enough at refinance, so have a backup plan before you borrow. Our guide to the BRRRR method explains each step.
Can you buy rental property with a self-directed IRA?
Yes, but the IRS rules on prohibited transactions are strict. A self-directed IRA (individual retirement account) can hold assets like real estate, and all rental income and costs must run through the IRA, not your own bank account.
You can't:
- buy property for personal use, now or in the future
- sell your own property to the IRA
- use the IRA as security for a loan
The same applies to deals with disqualified people, including your spouse, your ancestors (such as parents and grandparents), your lineal descendants (such as children and grandchildren) and their spouses.
Certain prohibited transactions can cause the IRA to lose its tax status from the first day of that year, with its assets treated as distributed. Pledging part of an IRA as security for a loan generally treats the pledged amount as a distribution. Talk to a certified public accountant (CPA) and an IRA custodian before you go down this route.
How much cash do you need to buy your first rental?
In our example, a $300,000 rental takes roughly $77,000 to $91,000, or 25 to 30% of the price, once closing costs, repairs and reserves are added. Here's how it adds up at 15% and 20% down with a conventional loan.
These are illustrative figures, not a typical national cash requirement. Your rate, taxes, insurance and closing costs will differ, so run your own numbers with our mortgage calculator.
Three things to watch:
- Mortgage insurance: the 15% column leaves it out, along with the bigger pricing adjustment, so that payment and its reserves will be higher.
- Reserves: eligible investments or retirement funds can count, not just cash.
- Repairs: standard loans don't usually cover them, so get a contractor's quote before you make an offer.
How do you know you can afford your first rental?
You can afford it if you'll still have cash in the bank after closing. A deal that only works if nothing goes wrong is too tight.
Before you sign, check that the rent covers the full payment, repairs and a few vacant months, and that you could pay a surprise repair bill without borrowing. If you're new to this, our guide on how to become a landlord covers what comes after the keys.
What do lenders look for on a rental property loan?
Lenders check five things: your down payment, credit score, reserves, debt-to-income ratio and how many properties you already finance. Most conventional investment loans follow the rules of Fannie Mae and Freddie Mac, the two government-sponsored companies that buy most US mortgages, so their rules set the floor.
Individual lenders can add stricter rules on top, so treat these as the minimum.
How much down payment do you need for a rental property?
Plan on 15 to 25% down with a conventional loan. Fannie Mae lets you borrow up to 85% of the price on a single-family rental and up to 75% on a duplex, triplex or fourplex.
Putting down less than 20% usually adds mortgage insurance and a higher rate. That's why many investors put down 20 to 25% to keep the payment and the pricing in check.
How does your credit score affect a rental property loan?
The higher your score, the cheaper the loan. Fannie Mae prices loans in credit score bands, and on loans longer than 15 years the best band starts at 780. That's a pricing tier, not a promise of any lender's best rate.
Rentals also carry an extra pricing adjustment of 1.125% to 4.125% of the loan amount, depending on how much you borrow against the value. It's a cost on the loan, not percentage points added straight onto your rate, and lenders usually pass it on as a higher rate rather than an upfront fee.
Pull your credit reports before you apply. You can get them free from Equifax, Experian and TransUnion at AnnualCreditReport.com, the official site, once a week. If you spot a mistake, the FTC explains how to dispute credit report errors with the bureau.
How much do you need in reserve?
Fannie Mae wants six months of the full payment on the new rental: principal, interest, property taxes, insurance and any homeowners association (HOA) dues (often shortened to PITIA). Reserves are money you still have after closing, and they don't all have to be cash: eligible investments and vested retirement funds can count too.
If you already have other financed properties, you need extra reserves on top. Two numbers decide how much:
- Percentage: 2% for one to four financed properties, 4% for five or six and 6% for seven to ten, counting your own home if it has a mortgage.
- Balance it applies to: the combined loans on your other financed properties, leaving out the rental you're buying and your own home's mortgage.
How does rental income affect your debt-to-income ratio?
Lenders count 75% of the expected rent toward your income, but first-time landlords get less benefit than they expect. Your debt-to-income ratio (DTI) is your monthly debt payments divided by your gross monthly income.
Here's how the rent is treated under Fannie Mae's rules:
- The 75% rule: the new rental payment counts as debt, and you're credited with 75% of the expected rent to allow for vacancies and upkeep.
- Under 12 months as a landlord: that 75% can only cancel out the new property's own payment, so your salary has to carry the rest of your debts.
- Proof of rent: the lender uses an appraisal rent schedule and, if an existing lease transfers to you, the signed lease.
- Your current housing: the lender must document your current housing payment before it can use the rental income.
Paying down a car loan or credit card before you apply is one of the quickest ways to qualify for more.
How many financed properties can you have?
Up to 10 under Fannie Mae's rules when you buy an investment property. That count includes your own home if it has a mortgage and the rental you're buying, so it means nine rentals plus a mortgaged home.
It's rarely a limit on your first rental, but it matters later. Past that point, investors move to portfolio or DSCR lenders.
How do you choose a lender?
Get quotes from at least three types of lender: a large bank, a local bank or credit union, and a mortgage broker. A broker shops your application to several lenders, while a direct lender funds the loan itself. Compare the fees and the cash you'll need at closing, not just the rate.
Before you commit, ask each one:
- How many investment property loans have you closed in the last year?
- What down payment and reserves will you need from me?
- How much of the expected rent will you count as income?
- Do you offer DSCR or portfolio loans if I don't qualify for conventional?
- What fees and pricing charges apply to a rental?
What documents will you need?
Requirements vary by lender and borrower, but expect to be asked for:
- two years of tax returns
- recent pay stubs or profit and loss statements
- two months of bank or investment statements
- the signed lease, if a tenant comes with the property
- income and expense records for any rental you already own
If you track rent and expenses in Landlord Studio, you can export an income statement in minutes when your next lender asks.
This article is general information about US mortgage rules, not financial, tax or legal advice. Lending rules and pricing change, and individual lenders can set stricter terms. Speak to a licensed lender, CPA or attorney about your situation.