Getting a Mortgage for a Rental Property
Securing a mortgage for a rental property differs significantly from obtaining one for a primary residence, and every difference traces to the same root: the lender prices you as a business, not a homeowner.
Government-Backed Loans such as FHA, VA, and USDA loans are designed for primary residences. They offer lower down payments and more lenient credit requirements. These loans cannot be used for rental properties unless it’s a multi-unit property where you live in one unit.
Rental Property Loans:
- Conventional Mortgages
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These are the most common for rental properties. They require higher credit scores and larger down payments.
- Jumbo Loans
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Used for properties that exceed conforming loan limits. They come with stricter requirements and higher interest rates.
If you already own a home, you can leverage its equity to finance a rental property:
- Home Equity Loan (HEL)
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A lump sum loan based on your home’s equity.
- Home Equity Line of Credit (HELOC)
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A revolving credit line that you can draw from as needed.
Lenders size these against a combined loan-to-value ceiling on the home’s appraised value — commonly 80%, sometimes 85% or 90% at a worse rate — not against your equity. The usable draw is therefore
so on a $1,500,000 home with a $700,000 first mortgage at an 80% ceiling you can reach , instead of 80% of your $800,000 of equity. One warning before you use one as a down payment: interest on home-equity debt is deductible only to the extent the proceeds buy, build, or substantially improve the residence securing the loan (section “Tax Deductions of The Mortgage Interest”). Borrowing against your house to buy a rental fails that test — but the interest is still deductible on Schedule E under the tracing rules, because the proceeds went into the rental activity. Trace and document the money; the deduction follows the use, not the collateral.