How to Qualify for an Investment Loan: Requirements and Eligibility

It’s always a good time to invest in real estate and start generating additional income.

If you’re interested in entering the world of fix-and-flips, rental units and more, you most likely will need to apply for an investment loan.

What's in this article?

How do investment loans differ from traditional home loans?
Key requirements for qualifying for an investment loan
How to improve your eligibility
Unlock your investment loan options with Compass Mortgage

In this article, we will explore what makes an investment loan different from a home loan, the key requirements for qualifying and how to improve your eligibility.

How do investment loans differ from traditional home loans?

The key difference between an investment loan and a traditional home loan is the purpose of the loan.

This can be confusing for borrowers because they can often use the types of loans they are familiar with to purchase an investment property. 

For example, conventional loans, FHA loans or even VA loans can be used to finance investment properties. 

But while a home loan is used to purchase a residential property, an investment loan is specifically used to purchase an income-generating property.

Examples of investment properties include:

  • Rental properties
  • Fix-and-flip projects
  • Commercial properties

Because it’s used for a different purpose, an investment loan will have different costs, rates and requirements than other financing options.

Investors can expect that in addition to providing income and credit documentation, lenders will also want to know the property’s income potential, as well as the investor’s previous experience with real estate assets.

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Key requirements for qualifying for an investment loan

Investment loan requirements depend on the loan type and terms, but let’s take a look at some general requirements.

Credit score/history

In general, the higher your credit score, the better. This is especially true for investment properties.

Your credit score should be in the high 600s to 700s to help you access the most ideal loan terms.

A low credit score could indicate to your lender that you won’t be able to honor your loan commitment. It’s a red flag for a loan that’s already considered a higher risk to lenders.

FHA and VA loans allow borrowers to purchase duplexes, triplexes or fourplexes as long as they are living in one of the units as their primary residence. Due to this requirement, these loan types may allow borrowers to qualify with a lower credit score than a conventional loan.

Debt-to-income ratio (DTI)

A borrower’s debt-to-income ratio (also referred to as DTI) compares your monthly debt payments to your monthly income.

While the specific DTI requirement will vary by lender, a DTI below 43% is typically preferred for investment property loans.

A higher DTI may be allowed if the borrower has a high credit score or large asset reserve.

Down payment amount

Conventional investment loans generally require a higher down payment amount than loans for primary residences. The down payment range usually is 15% to 25% of the property’s purchase price.

Because FHA loans have a primary residence requirement, they still may allow down payment amounts as low as 3.5%, and VA loans may allow zero down depending on the borrower’s credit.

Income documentation

Your lender will want to see evidence of stable employment history and documentation to verify your income, assets, identity and potential rental income.

They also may require that you have a certain amount of reserve funds available after the down payment and closing costs to cover unexpected expenses or vacancy periods.

Property evaluation

A property appraisal is crucial in determining its current market value and your loan amount.

For a conventional loan, appraisers determine the value based on a property’s condition, location, size and comparable sales in the area.

FHA loans have more stringent property inspection standards to evaluate safety, security and soundness. Appraisers for FHA loans must also be approved by the FHA.

Real estate experience

Your previous experiences with real estate investments will help demonstrate your past success and boost lender confidence, but a lack of experience won’t necessarily hurt your chances.

A solid business plan outlining your strategy, potential income, projected expenses and property management plans will demonstrate your preparedness and financial responsibility.

How to improve your eligibility

To improve your chances of approval and secure more favorable terms, consider the following tips before applying for an investment loan.

Boost your credit

A strong credit score is key to obtaining more favorable loan terms.

First-time investors should focus on improving their credit scores by paying bills on time, reducing credit card balances and addressing any errors on their credit reports.

Save for larger down payment

A larger down payment will reduce your loan-to-value ratio (also referred to as LTV), which can improve your chances of approval and potentially offer better loan terms.

A significant amount also demonstrates your financial discipline and commitment to saving, which goes a long way for investors.

Do your research

A deep understanding of the real estate market will help strengthen your plan.

Successful real estate investors are backed by a team of experts, including a financial advisor, attorney, real estate agent and mortgage lender.

Work closely with this team to understand the local market and what you need to do to unlock the best loan options for your unique scenario.

Unlock your investment loan options with Compass Mortgage

The first step in securing your perfect investment property is to apply for loan pre-approval.

The Compass Mortgage team will be your partner and advocate throughout every step of the process. We promise to offer the support and guidance you need as you begin or continue your real estate investing journey.

We offer the following loan options to help you achieve your goals:

We especially recommend our unique program known as Get Committed®, which provides borrowers with a fully underwritten loan commitment that both locks in their interest rate and grants full financial approval.

A loan commitment essentially has the power of a cash offer, proving to the seller that you’re fully approved financially and your deal won’t fall through.

Additionally, since Get Committed® does most of the work ahead of time, you can close on your loan quickly. Timing is crucial for investors who need to lock in a great deal. 

Submit your loan scenario with Compass Mortgage.

Photo by Sora Shimazaki