Overview

Buying a first rental is as much about matching the right loan product to your plan as it is about the property itself. Lenders treat investment properties differently than owner‑occupied homes: higher down payments, stricter reserves, and tighter underwriting on income and credit are common.

Loan options (quick comparison)

  • Conventional investment loans (Fannie/Freddie or portfolio): Typical route for single‑family rentals and small multi‑units. Expect higher rates than owner‑occupied loans and down payments commonly in the 15–25% range depending on lender, credit and the property type. Credit score guidelines generally start around 620 for conforming programs but stronger profiles get better terms.
  • FHA (limited use): FHA loans require the borrower to occupy the property as a primary residence. You may buy a 2–4 unit property with an FHA loan only if you live in one unit; FHA cannot be used to buy a single‑family home solely as an investment. See HUD/FHA occupancy rules for details (hud.gov).
  • VA loans: Similar occupancy rules for veterans — generally not for pure investment purchases unless other occupancy exceptions apply (va.gov).
  • DSCR and non‑QM loans: Underwrite primarily to the property’s cash flow (debt‑service coverage ratio) rather than borrower DTI. Useful for investors or self‑employed buyers with strong rental revenue but nonstandard documentation.
  • Portfolio and bank programs: Local banks or credit unions may hold loans in portfolio and offer flexible underwriting if you have a relationship or unique income streams.
  • Private (hard) money lenders: Fast closings and flexible qualifying but higher interest rates, shorter terms and lower loan‑to‑value limits. Best for quick acquisitions or heavy rehab deals.
  • HELOC / cash‑out refinance or seller financing: Alternatives when you want to leverage existing equity or use creative purchase structures.

How lenders typically evaluate rental income and underwriting

  • Rental income used in qualifying: Lenders often use a percentage of projected rent (commonly 75%) or rely on lease agreements and comparable rents. DSCR loans may accept 100% of documented rent if the property’s cash flow covers debt service. (See how lenders evaluate rental income.)
  • Documentation checklist: Be ready to provide photo ID, 2 years personal tax returns, 2 months to 12+ months bank statements (varies by program), pay stubs or other income verification, current leases (if any), a rent roll, and proof of reserves. For self‑employed borrowers, profit and loss statements and business tax returns are common. For full list, see Understanding Mortgage Underwriting: What Papers Lenders Want.
  • Credit and DTI: Aim for a minimum 620 credit score for many conventional programs; keep DTI within lender limits (often under ~45% for conventional underwriting). Non‑QM/DSCR loans use different metrics focused on property cash flow.
  • Reserves and seasoning: Investment loans frequently require cash reserves (often 3–12 months of mortgage payments) and may require seasoning of funds for the down payment (proof that funds haven’t been borrowed or recently gifted in some programs).
  • Appraisal and condition: Lenders will appraise the property and may require repairs completed before closing or an escrow holdback for rehab. For short‑term rental investors, expect scrutiny around location, occupancy and local regulations.

Underwriting tips for new landlords (actionable)

  1. Clean your credit and assemble file early: Pull credit reports, correct errors, and gather 2 years of tax returns, bank statements and current leases. Use the underwriting checklist link above to make lender conversations faster.
  2. Build reserves: Save 3–12 months of mortgage payments and operating cash for vacancies and repairs — many underwriters require reserves for investment loans.
  3. Run conservative pro forma: Underwrite using conservative rent and expense estimates (vacancy, management fees, capex). Lenders prefer realistic cash‑flow assumptions.
  4. Choose the right lender: Local banks, credit unions or investor‑friendly mortgage brokers often underwrite rental loans more flexibly than large retail banks. Shop rates and ask about seasoning, reserves and rental‑income treatment.
  5. Consider product fit: If you’ll live in one unit, FHA or VA might be options; if you own multiple rentals or have irregular income, DSCR or portfolio products could fit better.
  6. Get preapproval — and question assumptions: A preapproval that uses optimistic rental income can still fail at underwriting; insist lenders document how they’re counting rent.

Real‑world quick examples

  • Duplex purchase: An investor bought a 2‑unit property and planned to live in one unit. Using an FHA purchase with 3.5% down (occupancy required), they qualified with lower cash to close than a conventional investment loan — but had to occupy the property.
  • Rehab flip to long‑term rental: Another investor used a short‑term hard‑money loan to buy and rehab a property, then refinanced into a conventional rental mortgage after lease‑up and stabilization.

Common mistakes new landlords make

  • Relying on projected rent without backup: If appraisal comps or signed leases don’t support your rent, the lender may disallow it.
  • Underestimating reserve needs and operating expenses: Budget for vacancies, maintenance and capital improvements.
  • Using the wrong product: Trying to use an owner‑occupied program for a pure investment purchase can derail underwriting (FHA/VA occupancy rules are strict).

Useful links and resources

Bottom line

Match the loan to your business plan, assemble a complete underwriting package early, and run conservative rent and expense assumptions. If you’re unsure which product fits, consult an investor‑friendly mortgage broker or a licensed financial professional.

Professional disclaimer

This article is educational only and does not constitute personalized financial or tax advice. For guidance tailored to your situation, consult a licensed mortgage professional, CPA or financial adviser.