Conventional Loan

What Is a Conventional Loan?

A conventional loan is a mortgage that conforms to guidelines set by Fannie Mae or Freddie Mac and is not insured or guaranteed by a government agency. Conventional loans are the most common financing used by real estate investors because they offer the lowest interest rates and best terms available for investment properties. However, they come with stricter qualification requirements than alternative options like DSCR or hard money loans.

Down Payment and LTV Requirements

Conventional loans for investment properties require a minimum down payment of 15% for single-family properties and 25% for 2 to 4 unit properties, though many lenders require 20% to 25% across the board. This translates to 75% to 85% LTV. The down payment requirement is significantly higher than for primary residences because investment properties carry higher default risk. Putting more down, say 25% to 30%, can earn you a meaningfully better interest rate and eliminate the need for private mortgage insurance.

The 10-Property Limit

Fannie Mae allows individual borrowers to have up to 10 financed properties, including their primary residence. This is a hard limit that many scaling investors eventually hit. Once you reach 10 conventionally financed properties, you must turn to alternative products like DSCR loans, portfolio loans, or commercial financing. Some investors use their 10 conventional slots strategically, reserving them for their best properties with the strongest cash flow to maximize the benefit of lower conventional rates.

Income and DTI Qualification

Conventional lenders evaluate your debt-to-income ratio, typically requiring it to stay below 43% to 45%. Your total monthly debt payments, including all mortgage payments on all properties, must stay within this threshold relative to your gross monthly income. Rental income from existing investment properties can help by offsetting mortgage payments, but lenders typically only count 75% of rental income to account for vacancy and expenses. Self-employed borrowers need two years of tax returns showing sufficient income.

Credit Score Requirements

Most conventional investment property loans require a minimum credit score of 680, with 740 or higher earning the best rates. The rate difference between a 680 score and a 760 score can be 0.5% to 1.0%, which translates to hundreds of dollars per month on a typical investment property loan. Before applying, review your credit report, dispute any errors, pay down revolving balances below 30% utilization, and avoid opening new credit accounts. A few months of credit optimization can save thousands over the loan term.

Strategic Use of Conventional Financing

Maximize your conventional loan slots by using them on your strongest, longest-hold properties where the rate advantage compounds over decades. Use alternative financing like DSCR loans for shorter-term holds where the rate premium matters less. If buying with a spouse, consider how titling and loan applications affect your combined 10-property allotment. Work with a mortgage broker experienced in investment properties who understands how to structure applications to maximize your borrowing capacity while staying within DTI limits across your entire portfolio.