Investment loans are funds used to finance the purchase of income-generating properties, such as residential rentals, commercial buildings, or properties to be “flipped” for a quick profit. These loans differ from traditional mortgages by having stricter requirements and higher costs due to the increased risk for lenders. 

How investment loans work

The process for getting an investment property loan is similar to a conventional mortgage, but with more stringent qualifications. 

  • Borrower qualification: Lenders typically require higher credit scores and lower debt-to-income (DTI) ratios than for primary residences.
  • Larger down payments: Minimum down payments generally start at 15–20% and can be higher for multi-unit properties.
  • Higher interest rates: To offset the greater risk of default, lenders charge higher interest rates on investment property loans—often 0.5% to 0.875% higher than for a primary home loan.
  • Cash reserves: Many lenders require borrowers to have six months’ or more worth of mortgage payments in reserves to cover expenses if the property is vacant.
  • Income consideration: Lenders often allow you to use a portion of the property’s projected rental income (typically 75%) to help you qualify for the loan. 

Common types of investment loans

Conventional investment loans

These are the most common type of financing for purchasing residential rental properties, such as single-family homes or buildings with up to four units. 

  • Pros: Compared to other investment loan types, conventional loans usually have the most competitive interest rates.
  • Cons: Qualification standards are strict and the down payment is significant. 

Debt Service Coverage Ratio (DSCR) loans

DSCR loans allow you to qualify based on the investment property’s cash flow, not your personal income. 

  • Pros: Ideal for investors with substantial rental income but less stable personal income.
  • Cons: Interest rates are often higher than for conventional loans. 

Hard money loans

This is a short-term financing option from a private lender, with the loan primarily secured by the property’s value. 

  • Pros: Hard money loans feature fast approval and funding with less stringent credit requirements, making them ideal for “fix-and-flip” projects.
  • Cons: They are a very expensive option with high interest rates and fees, and the repayment period is short (one to five years). 

Portfolio loans

Offered by lenders who keep the loan on their own books rather than selling it, these loans can be customized with more flexible terms and lenient underwriting standards. 

  • Pros: Ideal for investors with multiple properties or those who don’t meet conventional lending standards.
  • Cons: Can be difficult to secure if you are not already a long-term client of the lending institution.