Traditional financing

Most real estate is bought with borrowed money. The loan you can get depends on a few things: whether you’ll live in the property, how many units it has, and whether it’s a home or a business property. Here are the main kinds and what each asks of you.

What you’ll learn

Why living in the property opens the lowest down payments.
What lenders ask of investors: larger down payments, savings in reserve and a limit on financed properties.
How FHA, VA and renovation loans work.
How to get pre-approved, and what lenders check: debt-to-income, credit, down payment and savings.
How DSCR and hard-money loans work, and what to have ready for each.
The waiting periods before refinancing a cash or hard-money purchase.
How commercial, SBA and short-term loans differ.
How one purchase compares across seven ways to pay for it.
What to check before you sign.

Loans for a home you’ll live in

Loan	Down payment	What to know
FHA	As low as 3.5% with a credit score of 580 or higher. With a score of 500 to 579, it’s 10%.	Your main home, one to four units. Mortgage insurance has an upfront cost at closing and a monthly cost.
VA	Often none, with full VA entitlement and the lender’s approval, as long as the price isn’t above the appraised value. With less entitlement left (for example, a VA loan you haven’t paid off), the lender may require a down payment.	For eligible veterans and service members who will live in the home. Can buy up to four units.
Conventional	Varies by lender and program.	If you put down less than 20%, you’ll usually pay private mortgage insurance (PMI). It protects the lender, not you.
FHA 203(k)	FHA terms.	Adds repair costs to the loan: up to $75,000 for smaller jobs (Limited 203(k)), or larger projects of at least $5,000 (Standard 203(k)).

You can use these loans to start investing: buy a two-to-four-unit home, live in one unit and rent out the others.

If you’ll live there, an FHA loan can cover about 96.5% of the price on a home with up to four units. With FHA, three or four units come with two extra rules:

The rent has to carry the loan. The lender starts with the appraiser’s market rent for all units, including yours. It takes off 25%, or the appraiser’s estimate for vacancy and upkeep if that’s bigger. What’s left must cover the full monthly payment, including taxes, insurance and FHA mortgage insurance (HUD Handbook 4000.1).
You need three months of payments in savings after closing.

Ask the lender to run the rent test before you pay for an appraisal or inspection.

Loans for investment property

An investment property is one you own but don’t live in. FHA and VA loans require you to live in the home, so expect to put more money down. On Fannie Mae loans, lenders also look for:

Savings in reserve: generally six months of payments for an investment property or a two-to-four-unit home you live in. If the new loan is for a second home or an investment property and you own other mortgaged properties, Fannie Mae adds more, in two steps (Selling Guide B3-4.1-01). Step 1: count every financed property you’re personally on the loan for. Include your own home if it has a mortgage, and the one you’re buying. Loans in an LLC’s name that you didn’t sign don’t count (Selling Guide B2-2-03). The count sets the rate: 2% for 1 to 4, 4% for 5 or 6, 6% for 7 to 10. Step 2: apply that rate to what you still owe on your other financed properties only. Leave out your own home and the one you’re buying. Example: your mortgaged home, 4 mortgaged rentals and the new rental make 6, so the rate is 4%. If you owe $800,000 in all on the 4 rentals, that’s $32,000 of extra reserves. That’s on top of the six months for the new loan. Ask your lender to confirm both steps for your loan, and whether it adds stricter rules of its own. Other loan programs (DSCR, hard-money, portfolio loans) set their own reserves.
A limit of 10 financed properties you’re personally on the loan for, counting your own home if it has a mortgage, when the new loan is for a second home or investment property. That limit of 10 applies to loans approved through Fannie Mae’s automated system, Desktop Underwriter (Selling Guide B2-2-03). If a lender would underwrite your loan by hand, ask whether it allows several financed properties at all.
Rent to help you qualify (Fannie Mae, long-term rental): the lender takes 75% of the market rent and subtracts the full monthly payment (principal, interest, taxes, insurance and HOA dues: PITIA). On a refinance of a rental already on your tax return’s Schedule E, the lender uses its cash flow from that return instead. Example: rent $2,400 × 75% = $1,800; payment $1,600; $200 left over. With 12 months or more of experience managing rentals, that $200 can count as income. With less, the rent still helps: it can cover the $1,600 payment, so that payment isn’t counted against you, but the $200 doesn’t count as income. If the result is negative, the shortfall counts against you either way. The 25% cut is the lender’s qualifying cushion, not a budget or a forecast of your profit. To count any rent from the property you’re buying, the lender must also document your current housing payment: the rent, mortgage payment or property taxes on the home you live in now (Selling Guide B3-3.8-01, B3-3.8-02). Other lenders and programs have their own rules.
Short-term (nightly) rentals, under Fannie Mae’s new rule: 50% of the market rent, only on a one-unit investment property that’s legally allowed to operate as a short-term rental (registered and licensed where required), and not from an ADU. On a refinance of a home already on your tax return’s Schedule E, the lender uses its actual cash flow from that return instead of 50% of market rent. Either way, a positive result can only offset the payment, never add to your income (Selling Guide B3-3.8-03).
When these rental income rules apply: Fannie Mae rewrote them in Announcement SEL-2026-08 (September 2, 2026, updated September 23, 2026). Lenders may use them now and must use them for loans with application dates on and after December 1, 2026.* Until then, your lender may still use the older rules, so the short-term rental option may not be offered yet. Ask: “Have you adopted Fannie Mae’s new rental income rules? What evidence of my current housing payment, rent and management history do you need?”

Rules change, and lenders can add their own. Ask a licensed loan officer for current requirements.

Getting approved, step by step

Talk to a lender before you make offers. A financing letter can make a seller take your offer more seriously, and you learn your real price range before you fall for a property. If you’re paying cash, get proof of funds (a recent bank or brokerage statement) instead. At an auction, what counts is having the money ready by the payment deadline, not a letter.

Pre-qualification and pre-approval: lenders use these names differently, so ask what the lender actually checked (credit, income, savings documents) and what is still a condition (the appraisal, title, insurance, the property itself, final underwriting). A letter based on checked documents is stronger, but no letter guarantees the loan. Each seller decides what they’ll accept; some bank-owned sellers ask for a specific letter or their own lender’s review.
Debt-to-income (DTI) ratio: your monthly debt payments, including the new loan, divided by your gross monthly income. Fannie Mae’s limit is 36% on loans a person underwrites by hand, up to 45% with strong credit and savings, and up to 50% through its automated system (Selling Guide B3-6-02).
Credit: a higher score gets a lower rate and fees. Investment-property loans already cost more than loans on a home you live in, so small score gains matter.
Down payment: on a Fannie Mae loan for an investment property, expect at least 15% down on one unit and 25% on two to four units, plus closing costs and the reserves above.
Compare at least three written quotes for the same property and loan, ideally on the same day. On a home loan covered by consumer rules (for example, one you’ll live in), compare Loan Estimates. On a loan for a rental you won’t live in, which federal rules treat as a business loan, ask for a written term sheet and a full fee list instead, and ask the lender which disclosures apply. Either way, compare the rate and whether it’s locked, points, fees, required reserves, prepayment penalties, any balloon, and the conditions still left before approval.

Have ready, for a regular investment-property loan: two years of tax returns and W-2s or 1099s, recent pay stubs, two months of bank and investment statements, the lease and rent history on any rentals you own, and an explanation for any large deposit.

DSCR loans: qualifying on the rent

A DSCR loan (debt service coverage ratio) is approved mainly on the property’s rent instead of your income. The lender divides the monthly rent by the monthly payment with taxes, insurance and any HOA dues. Many want 1.0 or more; a higher ratio gets better terms. Commercial lenders figure DSCR differently: they first subtract operating costs from the rent (that’s net operating income), then divide by the year’s loan payments. So the same property shows a lower ratio on a commercial loan.

Example: rent of $2,400 and a full payment of $2,000 is a ratio of 1.2.
They’re made by private lenders, not Fannie Mae or Freddie Mac, so terms vary widely. Down payments of 20% to 25% and higher rates than a regular loan are common.*
Many have a prepayment penalty for the first three to five years.* Ask how it’s figured before you plan to sell or refinance early.
Many lend to an LLC, usually with your personal guarantee.

Have ready: the lease or the appraiser’s rent estimate, your LLC papers if the LLC borrows, bank statements showing the down payment and reserves, and your credit report.

Run a rental’s DSCR in Analyze a deal: Keep and rent shows the coverage ratio for your loan.

Commercial and business loans

Commercial loans are sized on the property’s income. Lenders use the debt service coverage ratio (NOI divided by the year’s loan payments). Many aren’t fully paid off by the end of their term. Instead they end with a balloon payment, which you may need to refinance, and that can be hard if values fall.

Some commercial loans are nonrecourse: the lender can only take the property, not your other assets. They usually have “carve-outs” that make you personally liable in certain cases, so read them.

SBA 7(a): up to $5 million; can be used to buy, refinance or improve real estate for your business.
SBA 504: up to $5.5 million for buildings and land your business uses. It can’t be used to invest in rental real estate.
Bridge loans: short-term loans that carry a property until it’s stable enough to sell or refinance.

Private and hard-money lenders

Private lenders and hard-money lenders make loans secured by the property, often short-term. People use them for projects like flips when a bank loan doesn’t fit. Terms vary widely, so compare the rate, points, fees, term, and what happens if you can’t repay on time. Get every term in writing.

They lend on the deal more than on you: often a share of the price and repairs (loan-to-cost), capped at a share of the value after repairs.
Expect points paid up front, interest-only payments, and a term of about 6 to 18 months, with fees to extend it.*
Repair money usually comes in draws: you pay for work first, the lender inspects, then reimburses. Plan cash for the gap.
Have ready: the purchase contract, a scope of work with contractor bids, the after-repair value with comparable sales, your track record, and how you’ll repay (a sale or a refinance).

In Nevada, a specific state law covers mortgage companies and the private investors who fund loans (NRS 645B).

In California, finance lenders and brokers are licensed under the California Financing Law.

You can check many lenders on NMLS Consumer Access, the free national lookup. Some private lenders hold a different license, such as a real estate broker’s license, and some are exempt. Ask which license they hold and check it with that regulator.

Refinancing after a cash or hard-money purchase

Buying with cash or a short-term loan and then refinancing (the BRRRR plan) depends on a lender agreeing to the new loan, at the value an appraiser gives. Plan for the rules before you buy.

Waiting period: Fannie Mae requires you to be on title for at least six months before a cash-out refinance (with exceptions such as delayed financing), and Fannie Mae requires a first mortgage being paid off to be at least 12 months old (Selling Guide B2-1.3-03).
If you paid all cash, Fannie Mae’s “delayed financing” exception can let you take cash out sooner, limited to what you can document you put in, for an arm’s-length purchase (a sale between unrelated people at a market price).
A hard-money loan usually can’t be paid off with a regular cash-out loan until those periods pass. Some lenders allow a rate-and-term refinance sooner; ask before you buy, and make sure the hard-money term is long enough.
The new loan is sized on the appraisal and the rent, not on what you spent. A low appraisal can leave more of your cash in the property than you planned.

Run a BRRRR in Analyze a deal: Keep and rent shows your cash until the refinance closes, and what stays in after it.

Using equity you already have

A home equity line of credit (HELOC) lets you borrow repeatedly against your home’s equity. A cash-out refinance replaces your mortgage with a bigger one and pays you the difference, usually with closing costs. Both put your home on the line: if you can’t repay, you could lose it.

In Texas, a home equity loan, line of credit or cash-out refinance on your homestead is limited by the state constitution: all loans on the home together can’t exceed 80% of its market value, and the loan can’t close until 12 days after you apply or get the required notice, whichever is later (Texas Constitution, article XVI, section 50(a)(6)). Ask the lender how these limits apply to you.

Home equity, a HELOC or a cash-out refinance can fit some people and not others. Your situation, finances and risk tolerance decide it. Before you borrow for any deal, check these four things:

Compare all options relevant to you against your current income, debts, savings, cash reserves, loan costs and ability to make the payments.
Consider what you could lose if the investment goes wrong, repairs cost more, income falls or payments rise. Borrowing against your home can put it at risk if you cannot repay.
Decide whether that possible loss fits your risk tolerance, responsibilities and long-term financial plans.
Evaluate alternative ways to fund or repay the purchase if your first plan fails. Confirm their costs, approval requirements and timing: another loan, a refinance or a sale may not be available when you need it.

Seek advice from qualified professionals about financial matters, investments, taxes and legal obligations before you borrow or commit money. Evaluate the options relevant to you and make the decision that best fits your individual situation.

FTC cases found schemes that pressured people to borrow against their homes, credit cards or retirement savings. Make the financing decision separately from any seminar or coaching pitch, with independent advice.

Seminar red flags: How seminar and coaching schemes work, and the warning signs.

One $300,000 home, financed seven ways

The same purchase looks very different depending on how you pay for it. This example uses round numbers to compare structures. The rates are examples, not quotes: ask lenders for today’s rates. Monthly payments are principal, interest and mortgage insurance only. Taxes, insurance and closing costs come on top.

How you pay	Cash at purchase	Monthly payment	The catch
All cash	$300,000	None	Ties up all your money in one property. No help from a loan if repairs run over.
Conventional investment loan: 20% down, 7% for 30 years	$60,000	About $1,600	You qualify on your own income and credit, and need savings in reserve.
DSCR loan: 25% down, 7.75% for 30 years	$75,000	About $1,610	Qualifies on the property’s rent rather than your income, usually at a higher rate and down payment.
FHA: 3.5% down, 6.5% for 30 years	$10,500	About $2,000	You must live there (1–4 units). Includes FHA’s 1.75% upfront and 0.55% yearly mortgage insurance. With less than 10% down, the yearly premium lasts as long as the loan.
VA: no down payment, 6.5% for 30 years	$0	About $1,940	For eligible veterans who live there, with full VA entitlement (with less, the lender may require a down payment). Includes a 2.15% funding fee added to the loan: VA’s rate for a first VA loan with less than 5% down. After your first VA loan it’s 3.3% (about $1,960 a month here), and veterans who receive VA disability compensation, among others, pay none. You still need cash for closing costs unless the seller pays them.
Hard money: 90% of the price, 11% interest-only, 2 points	$35,400	About $2,480	Short-term, often due in about a year. You must sell or refinance in time, or face default.
Seller financing: 10% down, 6%, 30-year schedule, balloon after 5 years	$30,000	About $1,620	About $251,000 is still owed at year five. If you can’t refinance then, you could lose the property. On a home the buyer will live in, a seller who doesn’t use a licensed loan originator can include a balloon only if the seller is an individual (not a company), estate or trust that finances just one property in 12 months.

Lower cash up front usually means a bigger monthly payment, a requirement to live there, or a deadline you must meet. Run each option through Keep and rent in Analyze a deal before you choose.

Benefits for veterans: The VA funding fee by down payment and first or later use, and who is exempt.

Before you sign

Compare lenders. On most consumer home loans, such as a loan to buy a one- or two-unit home you’ll live in or a second home you won’t rent out, the lender must give you a Loan Estimate within three business days of your application. Home equity lines of credit (HELOCs) and reverse mortgages use different disclosures. Business loans don’t require this form. Federal rules treat two kinds of purchase loans as business loans. One is a loan for a rental you won’t live in, however many units it has. The other is a loan for a building with three or more units, even if you’ll live in one of them (living there means more than 14 days in the coming year). For those, ask for a written term sheet, and compare rate, points, fees, balloon and prepayment terms side by side.
Check the final numbers. On most consumer home loans (not HELOCs or reverse mortgages), you must receive the Closing Disclosure at least three business days before you sign the loan. Compare it with your Loan Estimate. A pre-approval is conditional: it isn’t a promise to fund.
Check each lender’s license with its regulator; NMLS Consumer Access covers many of them.
Plan for the worst case: higher repairs, a slow sale, or a vacancy while payments are due.

Put it into practice

Ask two lenders the same questions and compare their Loan Estimates or written term sheets side by side.

Key terms

Down payment: The part of the price you pay yourself, not borrowed.
Mortgage insurance (PMI, MIP): Insurance that protects the lender if you stop paying; required on many loans with small down payments.
Reserves: Savings left after closing, measured in months of loan payments.
Nonrecourse loan: A loan where the lender can only take the property if you don’t pay, subject to carve-outs.
Bridge loan: Short-term financing until a property can be sold or refinanced.
HELOC: A home equity line of credit: a revolving loan against your home.

Sources

Last reviewed 2026-09-29.