Buying an investment property is an exciting opportunity to earn rental income. But if you’re new to the process, you might be wondering what financing options you have. Can you get a conforming loan backed by Fannie Mae or Freddie Mac to buy an investment property like you can for a primary residence?
While you might think that you can’t use a Fannie or Freddie loan for an investment property, that’s not the case. You can.
"The most common misconception is that Fannie Mae and Freddie Mac loans are used only for primary residences, but in reality, both permit investment activities under very strict underwriting, reserve, and cash flow guidelines,” says Adrian Lawrence, chartered accountant, property investor, and founder of Ned Capital.
Some of those strict underwriting guidelines can include a larger down payment and a higher credit score compared to those needed for a primary residence. Plus, there are limits to how many financed properties you can own. But if you meet the criteria, a Fannie or Freddie loan can be a solid option to get you the keys to your next investment or rental property.
Here’s what you need to know about getting a Fannie Mae or Freddie Mac loan for an investment property, including loan options, eligibility criteria, and how to calculate rental income to qualify. We’ll also cover two low-down payment programs and lay out alternative financing options.
What are Fannie Mae and Freddie Mac?
Fannie Mae and Freddie Mac are two government-sponsored enterprises (GSEs) created to provide liquidity in the housing market.[1][2] They purchase loans that follow their qualifying criteria from lenders on the secondary mortgage market. In doing so, lenders have more readily available funds to offer more loans to aspiring homeowners.
The U.S. government created Fannie Mae in 1938 as part of the New Deal to make housing more affordable and accessible. This GSE was later responsible for developing the popular 30-year fixed-rate mortgage.
In 1970, Congress created Freddie Mac with a similar goal in mind: to further expand accessibility, affordability, and liquidity in the home lending market.
When a lender offers conventional conforming mortgages, it means that those loans (and borrowers seeking those loans) must meet qualifying guidelines set by Fannie or Freddie.
But in some cases, these qualifying guidelines aren’t the only ones you’ll need to meet for loan approval. Lenders can set their own requirements for borrowers to meet in addition to those set by the GSEs. These extra requirements are known as overlays.
While Fannie Mae and Freddie Mac set the standards for conventional loans that they can purchase, that doesn’t mean that borrowers will apply for financing from these enterprises. Instead, borrowers apply for funding from financial institutions offering investment property loans, such as an online lender or national bank.
Investment property loan requirements: Fannie Mae and Freddie Mac baseline
To get an investment property loan that meets Fannie Mae and Freddie Mac’s guidelines, you’ll need to meet these requirements.
| Down payment[3][4] | Minimum 15% (1 unit)Minimum 25% (2-4 units) |
| Credit score[5] | At least 620, often higher, up to 720 |
| Reserves | 6 months minimum, increases with number of financed properties owned |
| Maximum number of properties[5][6] | 10 |
| Required documents | Tax returns, W-2s, bank statements, rental income documentation |
How much you’ll need to put down for an investment property varies based on the property type and any lender overlays. A one-unit property comes with a minimum 15% down payment requirement. For a 2-4-unit property, you’ll need more funds up front: at least 25%. Lenders might ask for higher down payments than the set minimums to offset their risk.
In some cases, you can get an investment property with a credit score as low as 620 — but you’ll need a higher down payment and a lower debt-to-income (DTI) ratio. For example, Fannie Mae requires a 25% down payment and a maximum DTI ratio of 36% to qualify with a 620 credit score.[3]
Most lenders, however, want borrowers to have a credit score in the 680-720 range, especially if they’ve already financed multiple properties.
You’ll also need enough cash reserves saved to cover at least six months of mortgage payments. The amount of required reserves increases the more investment properties you own that are already financed. For example, if you own up to six financed investment properties, Freddie Mac asks that you provide proof of two additional months’ worth of reserves for each extra property.[7]
Here’s a basic calculation example of how to find six months’ worth of reserves if the subject property will be your first investment property. Say your monthly mortgage payment will be $3,000.
Calculation: $3,000 x 6 months required reserves = $18,000
That means you’ll need at least $18,000 readily available in reserve should you need it to repay your loan.
Lenders will also ask for at least two years of tax returns, two years of W-2s, and up to two months of consecutive bank statements. These documents assure lenders that you have enough cash reserves and a stable income to make your loan payments each month. In many cases, you can use your rental income, or projected rental income, to qualify (more on that below).
Some lenders may have overlays, which are stricter qualifying requirements than those set by the GSEs, to reduce their risk. If a lender’s overlays stray too far above GSE guidelines, it may be smart to shop around to find lenders with less strict criteria.
How rental income works for qualifying
When applying for a mortgage for a new investment property, lenders want to see a stable income stream to assess a borrower’s ability to repay a loan. Because many real estate investors generate rental income, the process to provide proof of income works a little differently.
It’s common for lenders to request support for expected rental income related to the property being acquired. Where possible, you can provide support for anticipated cash flows in the form of leases.
"In my situation, projections of rental income do come in for some consideration; nonetheless, the lender most heavily relied on [an] end–solidified copy of leases and previous tax return, which meant a conservative nature of the expected cash flow, rather than some effulgent assumption that always assumes the best occupancy,” said Lawrence.
If you’re going to use rental income to qualify, there are a few different ways you can do it.
Using rental income from the property you're buying
The first option is that you can use rental income from the property you intend to purchase (called the subject property). In this case, there’ll either be an existing tenant with a lease from which you can estimate your income, or you’ll have to use market rent as an estimate.
Let’s break it down further with some examples.
Scenario 1: Existing tenant with a lease
In this scenario, there’s a tenant already living on the property under a lease that charges $2,000 in rent per month. The lender then multiplies that rent payment by 75% to find the rental income after expected maintenance expenses and vacancies.
Calculation: $2,000 x .75 = $1,500
From there, the lender factors in PITI, or your monthly mortgage payment, by subtracting it from that $1,500 value. Let’s say that PITI is $1,000.
Calculation: $1,500 - $1,000 = $500 in rental income
Scenario 2: Using market rent from Form 1007/1025
What if there isn’t a current tenant on the property? In that case, the calculation is the same as the first scenario, but you’d use the market rent reported on Form 1007 or Form 1025 from Fannie Mae instead of a tenant’s current rent payment.
This allows an appraiser to determine a fair market rent estimate by comparing rent amounts from similar properties.
Using rental income from properties you already own
Along with or in place of the anticipated rent earned from the subject property, an investor may use income from properties they already own to support their loan application. Rental income, which is documented on Schedule E (IRS Form 1040), is subject to adjustments before lenders identify the final value they’ll use to assess a loan application.
"Underwriters will go through the Schedule E for an already-rented property and count 75% of the documented gross rents minus vacancy and operating expenses,” says Lawrence.
To find gross rents, lenders take the Schedule E net income, add back in reported depreciation expenses and deduct PITI to calculate the net cash flow generated by the property.
This method requires 1–2 years of landlord history to verify ongoing rental income.[8]
Here’s an example. Say your net income from all rental properties is $5,000, depreciation over the same time was $2,000, and PITI is $2,500.
Calculation: $5,000 net income + $2,000 depreciation = $7,000
$7,000 - $2,500 PITI = $4,500 in rental income
Converting primary residence to rental
In this scenario, a borrower converts a home they already live in as a primary residence into a rental property. In the rental income calculation, loan officers can use 75% of the signed lease amount or market rent value.[9] If a borrower is using a lease, it must be current and signed.
Let’s say you’re planning to use a lease, and the current lease brings in $3,000 in gross rent.
Calculation: $3,000 x .75 = $2,250
Now, if the borrower has at least one year of investment property management experience, they can use that full amount. If not, they’ll have to deduct PITI from that amount, illustrated below.
Calculation: $2,250 - $2,000 PITI = $250 in rental income
Lower down payment programs for multi-unit (owner-occupied)
Both Fannie Mae and Freddie Mac feature programs that allow borrowers to get an investment property loan for less than 10% down.[10] These options are tailored to qualifying low-income individuals.
Fannie Mae HomeReady
Fannie Mae’s HomeReady program is designed for low-income borrowers who have limited funds for a down payment. To qualify for this loan option, borrowers must meet these specific requirements:
| Qualifications[11] | One-unit property | Multi-unit property (2-4 units) |
|---|---|---|
| Down payment | Minimum 3% | 5-25% |
| Credit score | Minimum 620 | Minimum 620 |
| Income limits | Less than 80% of area median income | Less than 80% of area median income |
| Owner occupy | Yes | Yes |
| Eligible property types | 1-unit primary residence, condos, co-ops, PUDs, manufactured homes | 2-4 unit primary residence only |
| Required reserves | 0-6 months | 0-6 months |
To get a HomeReady loan, you must live on the property. For a one-unit property, you’ll only need 3% down, but that minimum increases with each extra unit, starting at 5% for a two-unit residence.
But that down payment doesn’t need to come all out of your pocket. You can put gift money toward your down payment contribution.
You’ll also need to meet income limits to qualify. In this case, that’s less than 80% of the area median income.
Beside income limits, you’ll have to abide by loan limits as well. That means your loan cannot exceed certain amounts:[12]
- One-unit: $832,750
- Two-units: $1,066,250
- Three-units: $1,288,800
- Four-units: $1,601,750
Note that high-cost areas (including Hawaii) have higher loan limits, up to $2,499,100 for a four-unit property.[12]
Freddie Mac Home Possible
Similar to the HomeReady program, the Home Possible mortgage is Freddie Mac’s option for low-income borrowers. This program has qualifying criteria to meet as well:
| Qualifications[13] | One-unit property | Multi-unit property (2-4 units) |
|---|---|---|
| Down payment | 3% minimum | 3-5% minimum |
| Credit score | 660 | 700 |
| Income limits | Less than 80% of area median income | Less than 80% of area median income |
| Owner occupy | Yes | Yes |
| Eligible property types | 1-unit primary residence, condos, co-ops, PUDs, manufactured homes | 1-unit primary residence, condos, co-ops, PUDs, manufactured homes |
| Required reserves | If manually underwritten, no minimum reserves requirement; otherwise minimum determined by Loan Product Advisor | If manually underwritten, two months of minimum reserves required, otherwise minimum determined by Loan Product Advisor |
If you’re buying a one-unit residence, you can qualify for the Home Possible program with just 3% down. That minimum rises to 5% for certain multi-unit properties.
There’s good news, though. Just like with the HomeReady program, you can use gift funds from family, friends, and relatives or grant funds to put toward your down payment.[13]
You’ll also need at least a 660 credit score. If you’re purchasing a multi-unit property, you’ll need even better credit — at least 700.
Income limits also apply to this program. If you make more than 80% of the area median income, you won’t qualify. So this loan may not be an option for you if you make too much money. The same loan limits as those listed above for the HomeReady program also apply to a Home Possible loan.
If you already own multiple properties, you won’t be eligible for this program. You can’t own more than two financed residential properties, including the property you’d like to buy.[13] Similarly to the HomeReady program, you must also live on the property as a primary residence. That means you cannot purchase the property solely for investment purposes.
Fannie Mae vs. Freddie Mac for investment properties
If Fannie Mae and Freddie Mac loans for investment properties are functionally similar, how do you choose between them? It can be most helpful to work with a mortgage lender to help decide which option might work better for your background and financial portfolio.
For example, Fannie Mae has less strict reserves requirements, which can make a Fannie Mae loan a better choice if you already own multiple properties. Freddie Mac guidelines state that if you own 7-10 investment properties, you’ll need eight months of reserves for each additional property.[7] This can limit investors from having more free cash on hand to purchase more investment properties.
When it comes to the lower down payment programs, Fannie Mae’s HomeReady program also has a lower minimum credit score requirement than Freddie’s Home Possible counterpart. If credit is a concern and you meet the income limits, you might chat with a lender about applying for a HomeReady loan.
Both GSEs only allow investors to own up to 10 properties. Those who own more than that will need to seek an alternative form of financing to further expand their real estate portfolio.
When buying an investment property, Lawrence used a Fannie Mae conventional loan to finance the purchase.
As an investor, I found the process very well disciplined and documented, which was predictable enough compared to financing that does not allow for much underwriting flexibility, with [the] benefit of competitive rates and long-term stability," says Lawrence.
Documentation you'll need
To apply for a property investment loan, you’ll need to provide a lender with documents describing your financial status. The lender then uses this information to assess risk and judge whether you’ll be able to repay the loan.
Before applying, it’s a good idea to get all your necessary documentation organized. That way, the application and underwriting process can move along more smoothly for everyone involved.
Here are some documents to have ready that lenders might ask for to determine your eligibility and ability to repay the loan:
- Two years of tax returns
- Two years of W-2s
- Two consecutive months of bank statements[14]
- Credit report
- Proof of required reserves
- Fannie Mae Form 1007 (single-family property), Form 1025 (2-4 unit property), or lease if using subject property income[15]
- Schedule E, leases, and two consecutive months of bank statements if using existing rental income
- Signed lease if converting primary residence to rental property
Out of all the required documentation to present to a lender, proving adequate reserves is often a challenging aspect for investors, particularly if they own multiple properties.
"Investors are surprised when documents arrive requesting reserves that must total at least six months of principal, interest, taxes, and insurance on each property that is financed,” says Lawrence.
Familiarizing yourself with Fannie Mae and Freddie Mac’s reserves requirements can be the best way to prepare for this request from a lender. As a general rule, the more investment properties you’ve already financed, the more reserves you’ll need to show for your next investment property purchase.
Keep in mind, too, that your provided monthly bank statements must be dated within 45 days of the date you apply for the loan.[14]
When to consider alternatives
A conventional loan that follows Fannie’s and Freddie’s guidelines might not be the best option for every real estate investor. Here’s when to consider exploring alternatives:
- You don’t have 15-25% for a down payment (and you’re not owner-occupying).
- Your credit score is below 620.
- The property you’re purchasing needs renovations.
- You own more than 10 properties (or more than two for the HomeReady or Home Possible programs).
- You have a unique situation that makes it hard to document your income.
A few other options exist for financing an investment property purchase if the conventional loan route won’t work for you:[16]
- Portfolio loan: This loan type stays on a lender’s books instead of being sold off on the secondary mortgage market. Because lenders keep these loans, they can often offer more flexible qualifying criteria but often at the expense of higher interest rates.
- Private lending: Instead of seeking financing through traditional public sources like banks or credit unions, borrowers can seek private lending options.
- Hard money loan: A hard money loan is a short-term loan often offered by private lenders. It can be a good option for those with lower credit scores. Instead of scrutinizing a buyer’s credit report, lenders approve these loans based on an asset’s value — in this case, the subject property.
- Seller financing: This option allows borrowers to secure financing for the property directly from the seller. Instead of paying a lender or servicer monthly mortgage payments, the buyer pays the seller.
- Government-backed loans: VA loan and FHA loan requirements are less strict than those needed to qualify for conventional loans. These can be good options for buyers with a military background or poorer credit scores.
The bottom line
Conventional loans that conform to Fannie and Freddie’s standards aren’t reserved only for primary residences. These GSEs offer conventional loans for investment properties, along with special low down payment programs for borrowers with low income.
Investors can use rental income from various scenarios, such as from leases with current tenants, to use on their loan application. In many cases, the calculation is 75% of rent minus the monthly mortgage payment or PITI.
In some cases, buyers can secure financing for as low as 3–5% down with a minimum 620 credit score. But keep in mind that the more properties an investor owns, the stricter the requirements become.
If you’re ready to purchase an investment property with the help of a Fannie or Freddie loan, shop around with lenders. Discuss requirements, provide your documentation, and ask about any overlays to help guide your decision.
A good real estate agent can help you find properties that are a good fit for your portfolio, no matter what type of loan you decide to use. Clever's network of top-tier agents is a great place to start!
» READ: How to Find an Investment Real Estate Agent
FAQ
Can you get a Fannie/Freddie loan for investment property?
Yes, you can get a Fannie Mae or Freddie Mac loan for an investment property, such as the HomeReady or Home Possible mortgages. But remember, you can’t apply for one of these loans through these enterprises. Instead, you’ll need to find a bank, credit union, or online lender that offers these mortgage programs to apply.
How much down payment is needed?
The required down payment will vary by a few factors, such as the number of units on the property and your credit score and DTI ratio. Baseline down payment requirements range from 15-25% of the purchase price. However, if you qualify for a Home Ready or Home Possible loan, your down payment could be as low as 3%.
How is rental income calculated?
It depends on how you plan to prove or estimate rental income. For example, if you’re using projected rental income from the property you’re buying, you’ll need to multiply rent (either from a current tenant or market rent) by 75% and subtract your PITI payment from that value.
Another option includes calculating rental income from other properties currently owned by using Schedule E or IRS Form 1040.[17] If you’re converting a primary residence to a rental property, you can base your calculation off of 75% of a signed lease or market rent.
What's the difference between Fannie and Freddie?
While Fannie Mae and Freddie Mac both buy loans from lenders, Fannie often purchases loans from bigger commercial banks while Freddie buys from smaller banks and credit unions.
They also maintain their own mortgage programs for low-income borrowers and vary on some of their qualifying criteria for conforming loans. For example, Freddie’s Home Possible loan requires a minimum 660 credit score for a single-unit property. Fannie Mae’s HomeReady loan comes with a 620 credit minimum.
Can you use conventional if you already own a home?
Yes, if you’ve already purchased a home with a conventional loan, you can apply for another to purchase an investment property. Since it’s a second property, be prepared for lenders to ask for more strict requirements compared to those needed for a primary residence. Shop around with the lender you’ve already gotten a conventional loan from and at least two other lenders to compare criteria and loan terms and rates.
What's HomeReady for multi-unit?
If you’re a low-to-moderate income borrower, you might qualify for a Fannie Mae HomeReady loan for a multi-unit (2-4 units) property — as long as you occupy one of the units as your primary residence, also called house hacking.[11] Condos, co-ops, and manufactured homes do not qualify.
Since Fannie only requires a 5% down payment and 620 credit score for 2-4 unit properties, this program could be a good option for you if you have minimal down payment funds or your credit needs some work. Keep in mind, however, that lenders may look for higher credit scores for multi-unit properties.