You can use conventional financing for your real estate investments. It’s one of the most common and flexible options out there for a variety of real estate investing strategies, especially if you’re planning to live in the property first as a house hacker or Nomad™ before converting it to a rental or for buy and hold.
Eligibility/Requirements
To qualify for a conventional loan, here’s what you’ll need:
- Credit score – You’ll generally need a credit score of 620 or higher to qualify, but for the best interest rates, you should aim for 740 or above.
- Special eligibility – This type of loan is widely available, and while there are no specific programs for first-time home buyers, you can access better down payment options through Fannie Mae’s HomeReady® or Freddie Mac’s Home Possible® programs.
Owner-Occupancy Requirement
If you’re using this loan for a Nomad™ or house hack, you must meet the following occupancy rules:
- Owner-occupancy requirement – Conventional loans allow you to buy the property as an owner-occupant, which means you’ll need to live in it for at least one year before converting it to a rental. Perfect for house hacking or the Nomad™ strategy.
If you choose an owner-occupant loan, you must move in. Failing to do so is loan fraud—a serious offense that could lead to imprisonment. And yes, lenders do check.
Think of your lender as a partner who’s willing to finance the vast majority of your property purchase. They offer impressive loan-to-value ratios: 100% for USDA and VA loans, 97% for your first owner-occupant conventional loan, 96.5% for FHA, and up to 95% for subsequent conventional, owner-occupant financing. These partners are offering you money at remarkably low, fixed interest rates. So why would you risk betraying their trust by not fulfilling your end of the agreement—like moving in?
Keep in mind, if lenders modify their owner-occupancy rules in the future, we’ll adapt our strategies accordingly. For instance, if they extend the requirement from 1 year to 2 years, we’ll adjust our Nomad™ strategy to a 2-year plan.
Down Payment
The down payment requirements vary based on your plans for the property:
- Owner-occupant down payment – If you’re buying as an owner-occupant, you can put down as little as 3-5% with private mortgage insurance (PMI). If you’re buying as an investor without occupying the property, you’ll need at least 15-20% down. If you put less than 20% down as an investor, you’ll have PMI.
- Second home (vacation home) – If you’re purchasing a second home for personal use, expect to put down at least 10%.
- Multi-family properties – For two- to four-unit properties, you’ll typically need at least 5% more in down payment compared to single-family homes.
Loan-to-Value (LTV) Ratio
Your LTV depends on whether you’ll live in the property:
- Owner-occupant LTV – As an owner-occupant, you can borrow up to 97% of the property’s value (3% down) for the first loan. Most additional owner-occupant purchases will require 5% down. So, when we model Nomad™ we often model it using 5% down for all the loans.
- Non-owner-occupant LTV – For non-owner-occupants, the maximum LTV is typically 80% (20% down). However, you may be able to get an 85% LTV (15% down) loan with PMI, but that loan will typically have a higher interest and PMI.
Interest Rates
There are two main types of interest rates to choose from:
- Fixed-rate loans – Most conventional loans come with fixed interest rates, which means your payment will stay the same for the entire term of the loan.
- Adjustable-rate mortgages (ARMs) – ARMs are available but usually less common for long-term rental property investors as it introduces an additional risk that you can easily opt out of by choosing a fixed-rate loan instead.
Amortization Period
Conventional loans offer two common amortization periods:
- 30-year term – The standard loan term is 30 years.
- 15-year option – While 15-year loans are available and they may have slightly lower mortgage interest rates than the 30-year alternative, they tend to increase your monthly payment because you’re paying off the same amount of loan over half the time, which can impact your cash flow. Most investors stick with 30 years for better monthly cash flow.
Private Mortgage Insurance (PMI)
If you’re putting less than 20% down, here’s what to know about PMI:
- PMI with low down payment – If you put down less than 20%, you’ll need to pay PMI.
- Canceling PMI – You can cancel PMI once you reach 20% equity in the property, either through appreciation or paying down the loan.
As we’ll explore in the PMI chapter, rolling PMI into the interest rate means it’s permanent—it won’t disappear. Alternatively, if you opt for a one-time, upfront PMI payment, you won’t have a monthly PMI charge to eliminate when you reach 20% equity.
Loan Limits
Conventional loans have loan limits that depend on your location:
- Loan limits by county – Conventional loan limits vary by county. Higher limits apply in more expensive areas, so check with your lender for the most up-to-date loan limits for your area.
Number of Loans Allowed
You can hold multiple conventional loans, but there are limits:
- Up to 10 conventional loans– Fannie Mae and Freddie Mac guidelines allow you to hold up to 10 conventional investor loans. However, there’s no limit on owner-occupant loans. This means you could have 10 conventional loans for investment properties and still purchase an 11th property as an owner-occupant (for Nomad™, house hacking, or permanent residence). If you continue Nomading™, you can exceed the 10-loan limit.
- Spouse consideration – If you and your spouse both qualify, you can potentially hold up to 20 loans between the two of you. Depending on the lender you may get pushback from underwriting on this, so be sure to discuss it with them in advance.
Seller Concessions
Seller concessions allow the seller to contribute towards your closing costs. You can negotiate these when making an offer on the property.
You cannot use seller concessions as your down payment. You will always need the down payment amount.
Seller concessions for conventional loans:
- Owner-occupants – For owner-occupants, the seller can contribute up to 6% of the purchase price if you put down 20%.
- Investors – For investors, the limit is 2%.
Waiting Period After Major Financial Events
If you’ve gone through bankruptcy or foreclosure, here’s what to expect:
- Bankruptcy waiting period– For Chapter 7 bankruptcies, you must wait 4 years after dismissal or discharge before applying for a conventional loan. For Chapter 13 bankruptcies, the waiting period is 4 years from the filing date and 2 years from the discharge date.
- Foreclosure waiting period – The conventional loan foreclosure waiting period is typically seven years, though it may be shortened to two to three years in extenuating circumstances.
Refinancing Rules
Here’s what you need to know about refinancing:
- No waiting period for rate/term refinance – You can refinance your conventional loan as soon as you close if you’re looking to lower your interest rate.
- Cash-out refinance – There’s a 12-month waiting period for cash-out refinances.
- Recast – You may be able to recast a conventional loan, but not all lenders offer it.
Property Types Eligible
Conventional loans can be used to purchase a variety of property types:
- 1-4 units – Conventional loans can be used to purchase 1-4 unit residential properties. This makes it ideal for both single-family homes, condos, townhomes and small multi-family properties if you’re looking to expand your portfolio.
Special Loan Features
Both Fannie Mae and Freddie Mac offer conventional loans, but there are slight differences:
- Fannie Mae vs. Freddie Mac – There are small differences in their rules for refinancing, cash-out limits, and multi-unit properties. Check with your lender to see which is the better fit.
Approval and Underwriting Process
The timeline and requirements for approval are fairly standard:
- Two to four weeks for approval – Underwriting for conventional loans can take two to four weeks. Some lenders may be able to get it done quicker if needed. It’s a fairly straightforward process, especially if you have a good credit score and documented income.
- DSCR for investors – If you’re buying the property strictly as an investor, the lender may consider the property’s Debt Service Coverage Ratio (DSCR), which looks at the income the property generates compared to the mortgage payment.
Risks and Considerations
There are a few risks and considerations you should keep in mind:
- Lock in your rate early – Lock in your rate early, especially in a rising interest rate environment. Even if you’re starting as an owner-occupant, plan for the long term when the property becomes a rental.
- Keep rates low on early properties – If you’re building a portfolio, try to keep your interest rates as low as possible on your first few properties, as you might not be able to do cash-out refinances on all of them down the road.