How to Choose the Best Mortgage Type for an Investment Property

6 October 2025

Investing in real estate is one of the smartest ways to build wealth. But before you dive in, there’s one key decision that can make or break your investment—choosing the right mortgage. Unlike a primary residence loan, an investment property mortgage comes with different rules, requirements, and risks.

So, how do you pick the best financing option? Let's break it down step by step.

Understanding Investment Property Mortgages

An investment property mortgage is different from a standard home loan. Lenders see investment properties as riskier because borrowers are more likely to default on them compared to their primary homes. Because of this, interest rates tend to be higher, and the qualification requirements can be stricter.

The goal is to find a mortgage option that balances affordability, flexibility, and profitability. The best choice depends on your financial situation, long-term goals, and risk tolerance.

Key Factors to Consider Before Choosing a Mortgage

Before we dive into the different mortgage types, here are some crucial things to consider:

1. Your Credit Score

Your credit score plays a major role in qualifying for the best rates. Most lenders require a score of at least 620, but for better rates, aim for 700 or higher. A strong credit score can help you secure lower interest rates, ultimately saving you thousands over the life of the loan.

2. Down Payment Requirements

Unlike primary residences, investment properties typically require a larger down payment—usually around 15-25%. A higher down payment reduces lender risk and can sometimes result in better loan terms.

3. Debt-to-Income Ratio (DTI)

Lenders assess your DTI to determine if you can handle additional debt. A lower DTI indicates financial stability, making you a less risky borrower. Ideally, keep your DTI below 43% to improve your chances of approval.

4. Loan Term Length

Decide how long you want to pay off the mortgage. A 15-year term means higher monthly payments but lower total interest. A 30-year term offers lower monthly payments but more interest over time. Choose based on your cash flow strategy.

5. Fixed vs. Adjustable Rates

Are you comfortable with fluctuating interest rates, or do you prefer stability? A fixed-rate mortgage locks in an interest rate for the life of the loan, while an adjustable-rate mortgage (ARM) starts low but can change over time.

Types of Mortgages for Investment Properties

Now that you know the basics, let’s explore the different types of mortgages available for investment properties.

1. Conventional Loans

Conventional loans are the most common financing option for investment properties. They aren’t government-backed, which means stricter requirements but more flexibility.

✅ Pros:
- Competitive interest rates for borrowers with strong credit
- No property restrictions (you can use it for single-family, multi-family, condos, etc.)
- Can finance multiple properties

❌ Cons:
- Requires a high credit score (usually 620+)
- Minimum 15-25% down payment
- Stricter approval process

💡 Best For: Investors with good credit and enough cash for a larger down payment.

2. FHA Loans (Not Ideal for Investment Properties)

FHA loans are government-backed and designed for primary residences. However, if you plan to live in the property for at least a year before renting it out, you might qualify.

✅ Pros:
- Low down payments (as low as 3.5%)
- Easier qualification for those with lower credit scores

❌ Cons:
- Must live in the property for at least 12 months
- Mortgage insurance premiums increase overall costs

💡 Best For: House hackers—people who live in a multi-family property and rent out the other units.

3. VA Loans (For Eligible Veterans and Service Members)

VA loans offer great benefits, including no down payment and competitive rates, but they’re only available to qualified veterans, active-duty service members, and their families.

✅ Pros:
- No down payment required
- No private mortgage insurance (PMI)
- Lower interest rates

❌ Cons:
- Only available to eligible military personnel
- Must meet occupancy requirements

💡 Best For: Veterans looking to invest with minimal upfront costs.

4. Portfolio Loans

Portfolio loans are offered by banks that don’t sell mortgages to government-sponsored entities like Fannie Mae or Freddie Mac. These loans can have more flexible terms but higher interest rates.

✅ Pros:
- More flexible lending requirements
- Can be customized for specific investment strategies

❌ Cons:
- Higher interest rates and fees
- Can be harder to find lenders offering this option

💡 Best For: Experienced investors with unique financial circumstances.

5. Hard Money Loans

Hard money loans come from private lenders, not traditional banks. They’re short-term loans often used for fix-and-flip projects.

✅ Pros:
- Quick approval process
- Doesn’t rely heavily on credit scores
- Ideal for short-term investment projects

❌ Cons:
- Extremely high interest rates (often 8-15%)
- Short repayment terms (usually 12-36 months)

💡 Best For: Fix-and-flip investors who need fast funding.

6. DSCR (Debt Service Coverage Ratio) Loans

Unlike conventional loans, DSCR loans focus on the income your property generates instead of your personal income.

✅ Pros:
- No personal income verification required
- Ideal for investors with multiple properties

❌ Cons:
- Higher interest rates
- Requires a property with strong rental income potential

💡 Best For: Investors who rely on rental income to qualify.

7. Home Equity Loans & HELOCs

If you already own property, you can tap into your home’s equity to finance a new investment. A home equity loan gives you a lump sum, while a Home Equity Line of Credit (HELOC) works like a credit card.

✅ Pros:
- Can use existing home equity for financing
- Often lower interest rates than investment property loans

❌ Cons:
- Puts your existing home at risk if you default
- Requires significant home equity

💡 Best For: Homeowners looking to leverage existing assets.

What’s the Best Mortgage for You?

Choosing the right mortgage depends on your investment strategy:

- Buying and holding for long-term rental income? A conventional loan or a DSCR loan might be best.
- Looking for fast financing for a flip? A hard money loan could make sense.
- Want to leverage existing assets? Consider a HELOC or home equity loan.
- Are you a veteran? VA loans offer unbeatable benefits.

The key is to run the numbers, compare interest rates, and factor in your own financial situation before making a decision.

Final Thoughts

Picking the right mortgage for an investment property isn't a one-size-fits-all deal. It depends on your goals, financial health, and risk tolerance. Take the time to research, plan, and consult with a mortgage professional to make the smartest financing decision.

No matter which loan type you choose, remember—your mortgage should complement your investment strategy, not work against it!