Can you buy an investment property with a low down payment?

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

Edited by Michael Jensen, Mortgage and Finance Guru

Updated October 20, 2020

The answer to your question depends on the number of units in the investment property and the type of mortgage. According to standard mortgage guidelines, lenders permit a maximum loan-to-value (LTV) ratio of 85% for a mortgage on single unit investment property, which implies a minimum down payment of only 15%.

For a two-to-four unit investment property, the maximum LTV ratio is 75%, which implies a down payment of 25%. These maximum LTV ratio guidelines apply to investment property purchase mortgages using a fixed rate or adjustable rate mortgage (ARM).

For refinances that involve a minimal amount of cash out, the maximum LTV ratio for an investment property is 75% for one-to-four unit properties. For a cash-out refinance of an investment property, the maximum LTV ratio for a single unit property is 75% and the maximum LTV ratio for a two-to-four unit property is 70%.

Review How Investment Property Mortgages Work

As outlined above, the maximum LTV ratio and minimum down payment required to qualify for an investment property mortgage varies based on the number of units in the property and the type of transaction.

The table below outlines interest rates and closing costs for investment property mortgages. We recommend that you contact multiple lenders to understand their qualification guidelines and to find the best mortgage terms.

There are several points to keep in mind regarding financing an investment property. First, from a technical standpoint, lender guidelines typically apply a maximum LTV ratio as opposed to a minimum down payment requirement. This means you may be able to qualify for an investment property mortgage with a down payment of less than 15% (for a single unity property) and 25% (for two-to-four unit property).

In this scenario you would obtain a second mortgage that enables you to make a lower down payment while meeting the lender’s maximum LTV ratio requirement. For example, if you want to buy a one-unit rental property for $400,000, you would usually be required to make a down payment of $60,000 (15% (required down payment) * $400,000 (property price) = $60,000).

If you only had $40,000 for a down payment, you could potentially take out a second mortgage for $20,000 to pay the remaining amount. In this case, the LTV ratio for the first mortgage remains at 85% but you only make a 10% down payment and the remaining 5% of the purchase price comes from a second mortgage.

We should highlight that getting a second mortgage on an investment property can be challenging and not all lenders offer this type of loan program. You also need to demonstrate that you earn enough money, or that the property produces sufficient rental income, to qualify for both the first and second mortgages.

Additionally, the second mortgage lender may apply its own maximum combined loan-to-value (CLTV) ratio limit that is consistent with the guidelines outlined above. For example, if the second mortgage lender CLTV ratio limit is 85% for a single unit investment property then you are still required to make a 15% down payment so the second mortgage offers no additional financial flexibility or borrowing capacity relative to the first mortgage.

We recommend that you contact multiple second mortgage lenders to understand if they offer investment property loans and to understand their mortgage terms. While a smaller number of lenders offer this loan program, it does not hurt to ask.

The final option to consider if you want to buy an investment property is to live in one of the units of a multi-family property. Several low down payment mortgage programs enable you to by a multi-family property with up to four units as long as you live in one of the units for at least a year after your loan closes.

Conventional mortgage guidelines permit an 85% LTV ratio for a two unit owner occupied property, compared to a 75% LTV ratio for a two unit investment property. The Home Possible program only requires a 5% down payment for multi-family properties with up to four units and the FHA mortgage program only requires a 3.5% down payment.

While these programs do not permit you to finance an investment property, you can rent out the units you do not live in. For example, if you buy a three unit residence, you occupy one of the units as your primary residence and then rent out the other two units. Although this approach does not allow you to rent out all of the units in the property you purchase, using a multi-family property mortgage enables you to grow your rental property portfolio while minimizing your down payment. 

Sources

"Standard Eligibility Requirements: Investment Property."  Eligibility Matrix.  Fannie Mae, October 2 2019.  Web.