Can I Put Less Than 20% Down on an Investment Property?

While a 20% down payment is common for investment properties, it is not the only path. Various financing strategies and loan structures allow individuals to purchase investment properties with lower upfront capital, potentially accelerating wealth creation.

Financing Paths for Lower Down Payments

Several distinct financing avenues are available for those looking to invest in real estate without a full 20% down payment. Each option comes with its own set of considerations.

Conventional loans

Conventional loans for investment properties sometimes allow less than a 20% down payment but typically require private mortgage insurance (PMI). This enables lenders to offer mortgages with smaller down payments, usually 15% to 19.9%.

Government-backed loans

Government-backed loans (FHA, VA) primarily target owner-occupied residences but can be used for multi-unit properties. “House hacking” involves purchasing a multi-unit property and living in one unit while renting others. These loans offer lower or no down payment for eligible borrowers, provided they meet strict owner-occupancy criteria, often for at least one year.

Smaller financial institutions

Smaller financial institutions, like local banks and credit unions, sometimes offer “portfolio loans” for investment properties. Unlike conventional loans, portfolio loans are retained by the originating lender. This allows greater flexibility in underwriting, potentially leading to more lenient down payment requirements or customized terms unavailable through larger programs.

Seller financing

Seller financing allows the property owner to directly provide a loan to the buyer, bypassing traditional lenders. The buyer makes payments directly to the seller based on agreed-upon terms formalized in a promissory note. This method can significantly reduce upfront cash, as the down payment is negotiated directly and is often more flexible than bank requirements.

Private or hard money loans

Private or hard money loans are short-term, asset-based loans used for property acquisition or renovation, especially for fix-and-flip projects. Provided by private individuals or companies, they are secured by the property’s value rather than the borrower’s creditworthiness. While often having higher interest rates and fees, they offer quicker funding and flexible terms, sometimes allowing smaller down payments or even 100% financing.

Key Qualifications for Borrowers

Lenders assess several factors when evaluating a borrower’s eligibility for investment property loans, particularly with lower down payments.

Credit score

Credit score requirements for investment property loans are typically more stringent than for primary residences. While a conventional loan might be accessible with a score around 620, 720 or higher can lead to better terms. For lower down payments, lenders often seek higher scores, sometimes 680 or 700. A strong credit history indicates responsible financial management.

Debt-to-income (DTI) ratio

The debt-to-income (DTI) ratio compares a borrower’s total monthly debt payments to their gross monthly income. For investment properties, lenders generally prefer a DTI below 43%, or even 35%, to ensure debt manageability. While potential rental income can be considered, lenders often apply a conservative estimate, such as 75% of projected rent, when calculating its contribution.

Cash reserves

Lenders typically require sufficient cash reserves to cover unexpected expenses or vacancy periods. For investment properties, this often means liquid funds equivalent to several months of mortgage payments, usually six months. These reserves demonstrate the borrower’s ability to maintain the property and meet obligations even if rental income is disrupted. Acceptable sources include checking, savings, and liquid investments.

Occupancy status

Property occupancy status significantly impacts loan availability and terms. Lower down payment loans (FHA, VA) are generally for owner-occupied properties, requiring the borrower to reside in one unit of a multi-unit property. Non-owner-occupied investment properties typically face higher down payment requirements and stricter criteria due to increased risk. Misrepresenting occupancy can lead to severe consequences.

Property type and condition

Property type and condition influence a lender’s willingness to offer lower down payment options. Lenders prefer properties in good condition requiring minimal repairs. The number of units (single-family vs. multi-family) can affect loan-to-value (LTV) limits and terms. Properties with complex structures or significant deferred maintenance may be viewed as higher risk, leading to more restrictive financing.

Understanding Loan Structures and Costs

Once a borrower qualifies for an investment property loan with a lower down payment, understanding the financial characteristics and associated costs is essential.

Private Mortgage Insurance (PMI)

Private Mortgage Insurance (PMI) is common for loans with less than a 20% down payment, protecting the lender if the borrower defaults. It’s typically required when the loan-to-value (LTV) ratio exceeds 80%. Premiums can be monthly, upfront, or a combination. PMI can often be removed once equity reaches 20% of the original purchase or appraised value, or when the loan balance is paid down to 80% of the original value.

Interest rates

Interest rates for investment property loans with lower down payments are generally higher than for loans with 20% or more down. This reflects higher perceived risk to the lender, as a smaller equity stake means less personal capital at risk. The rate difference impacts monthly mortgage payments and total loan cost.

Loan-to-Value (LTV) ratio

The Loan-to-Value (LTV) ratio correlates directly with the down payment amount, calculated by dividing the loan amount by the property’s appraised value. A higher LTV signifies a lower down payment, often associated with higher interest rates and PMI. Lenders typically set LTV limits, with investment properties often having maximum LTVs between 70% and 80%, meaning a minimum down payment of 20% to 30% is common.

Closing costs

Closing costs are additional upfront expenses incurred during property acquisition, separate from the down payment. These costs range from 2% to 6% of the loan amount for financed purchases. Common costs include loan origination, appraisal, title insurance, and processing fees. Buyers should budget for these immediate expenses, as they typically cannot be rolled into the mortgage loan.

Escrow accounts

Escrow accounts are established by lenders to manage property expenses like taxes and homeowners insurance. A portion of the monthly mortgage payment is deposited, and the lender uses these funds to pay bills when due. This ensures timely payment, protecting the lender’s interest and providing convenience by consolidating payments.