Non-owner-occupied mortgage rates: What investors need to know

Investment properties can mean passive rental income generated over time, creating a steady revenue stream from your real estate investments. Maybe you’re even remodeling homes and flipping them for profit. But when running the numbers on whether your investment makes sense, non-owner-occupied mortgage rates factor in.

What is a non-owner-occupied mortgage?

A non-owner-occupied mortgage finances a home that the owner doesn’t live in. These loans are used to buy investment properties, such as homes you rent out or buy to renovate and flip to a new owner. In contrast, owner-occupied mortgages are used to buy primary homes and vacation properties that the owner plans to live in.

Lenders consider non-owner-occupied mortgages more of a risk than owner-occupied loans. If you struggle to find renters or your renovation project doesn't go as planned, you may have trouble paying back the loan. In times of turbulence, people often prioritize paying for their home over investing.

Non-owner-occupied mortgage rates

Because lenders consider investment property loans riskier, they usually charge higher rates compared with owner-occupied financing. Other factors that determine the interest rate on a non-owner-occupied loan include the size of the down payment and the borrower’s credit score.

Key differences between owner-occupied and non-owner-occupied loans

There are a few big differentiators between an investment property loan and those for owner-occupied properties.

The real theme of investment property financing is that you can still qualify, but there’s a higher bar for similar terms.

What to expect if you’re applying for a rental property mortgage

We’ve touched on non-owner-occupied loan requirements being more strict, but looking at it from the perspective of a borrower gives you a better idea of what to expect.

Credit score requirements

The credit score requirement for buying an investment property depends on your down payment. The most common method is a conventional loan.

The qualifying credit score for a conventional loan is 620 across the board except for the minimum 15% down payment on a single-unit rental home, which requires a 680 median credit score.

Credit score minimums can change with higher loan amounts. Jumbo loans require a credit score between 680 and 720. If you have seven or more homes in your portfolio, you need a 720 minimum credit score.

Regardless of the minimum qualifying score, the interest rate you get from any lender will improve as your score increases.

Minimum down payment

You can expect your lender to require between 15% and 30% of the purchase price as a down payment on a conventional conforming loan, based on the number of units the home has, your credit score, and whether you’re taking cash out. Jumbo loans for investment properties have down payments of 20% – 50% depending on the loan amount. A higher down payment may help reduce the loan’s interest rate.

Another consideration that’s unique to investment properties is that you must fund the down payment on your own. Gift funds can’t be used.

Cash reserves

You’ll need enough cash in reserve to afford the monthly mortgage payment for a specific number of months if you lose your job or have trouble renting out the property. Some mortgage investors determine this on a case-by-case basis. Rocket Mortgage^® requires at least 6 months of cash reserves for an investment property. For jumbo loans, this can be up to 18 months based on the loan amount.

Acceptable assets to prove the ability to repay include everything from checking and savings accounts to stocks, bonds, and wedding or graduation gifts. Unacceptable funding sources include, but aren’t limited to, business loans, gifts that need to be repaid, salary advances, and non-liquid personal assets.

This is particularly important to consider if you’re financing multiple properties, as there may be times when your rental is vacant and you have no income from it.

Debt-to-income (DTI) ratio

Your DTI ratio shows how much of your monthly income is needed to pay your debts. When qualifying for your mortgage, the lender will calculate your DTI ratio to include your projected mortgage payment. Generally, the maximum DTI you can qualify with for an investment property is 45%. Some investors look at each loan individually.

You can improve your qualification options by working on the debt or income side of the equation. Paying off existing debts, starting with the ones that require the biggest monthly payment, can be helpful. You can also ensure that potential rental income is included in your DTI ratio. Calculating your DTI ratio early can help you know what to expect.

Property appraisal

Any appraisal estimates the fair market value of the property and makes sure basic health and safety requirements are met for occupancy. There are a couple of other brief items that may apply to investment properties:

• Rental income calculation. In some instances, appraisers include your potential rental income in their appraisal, and this may be used to show possible income for qualification.
• Renovations. While Rocket Mortgage doesn’t offer these, there are some loan options that allow someone to evaluate future renovations as part of the property value when buying or refinancing a home.

If the property appraisal is lower than expected, it will limit how much you can borrow, and you may have to pay more out of pocket to buy the home. You should ask your real estate agent for a comparative market analysis to avoid surprises when the appraisal comes

Are there alternatives to non-owner-occupied mortgages?

You can also access alternative financing options beyond non-owner-occupied mortgages if you wish to expand the scope of your real estate investments.

FHA loans

Real estate investors who are considering purchasing owner-occupied multifamily homes of up to 4 units may be able to take advantage of Federal Housing Administration (FHA) multifamily loans. Moreover, once you’ve satisfied the FHA’s 1-year owner-occupancy requirement, you can rent out your unit and move into a new property.

SBA loans

On the other hand, if you already have a demonstrated business record in real estate investing, there are also Small Business Administration (SBA) loans available for landlords who are ready to graduate from real estate side hustle to career real estate investors.

It’s also worth keeping in mind that the SBA loan application process focuses more on an applicant’s business plan and track record than personal credit score and debt-to-income ratio, though these factors are considered as well.

What to expect if you’re applying for a rental property mortgage

Looking to apply for a rental property mortgage on an investment property? It’s important to keep several things in mind.

Higher interest rates

Lenders evaluate mortgages along a spectrum of risk. Non-owner-occupied mortgage rates are higher because they tend to carry higher risks. For example, if the borrower runs into financial hardship, they’ll likely choose to pay for their primary residence before a rental property.

A borrower’s credit score and credit history can also impact interest rates. Generally, the higher your credit score, the more favorable interest rate you’ll receive. The type of property and number of residences you own may impact your interest rate as well

Shorter terms

While a home buyer can extend repayment over 30 years, non-owner-occupied mortgage lenders tend to offer shorter loan terms. Rocket Mortgage® can offer borrowers long-term loans for non-owner-occupied mortgages – speak with one of our Home Loan Experts for details.

Higher down payments

Because they’re taking on a significant risk, financial lenders will generally require a 20% – 30% down payment from investment property borrowers wishing to apply for a non-owner-occupied mortgage loan.

Adjustable- or fixed-rate interest rates

There are both fixed-rate mortgages and adjustable-rate mortgages (ARMs) available for non-owner-occupied loans, the latter of which can cost investors much more should interest rates rise significantly. Some real estate investors may lean toward ARMs if they’re not planning on long-term ownership.

Strict credit requirements

Lenders typically require higher credit scores from non-owner-occupied mortgage applicants, at least a 620 FICO^® Score. Additionally, lenders will verify that a borrower has a manageable debt-to-income ratio (DTI) and large cash reserves to cover unforeseen costs or vacancies.

Tips to strengthen your application

There are some things you can do to improve your chances of qualifying, whether it’s an investment property or any other type of mortgage:

• Pay down existing debts to improve your DTI. Pay particular attention to revolving debts on credit cards and other lines of credit, as these may be more discretionary. House or car payments usually are paid off over a longer time frame.
• Save early and often when it comes to down payments and cash reserves.
• Gather the paperwork lenders are likely to ask for early on. This includes W-2s, 1099s, tax returns, bank statements, and lease agreements.
• Be sure to ask your lender about its available options for investment properties so you can choose the right one for you.
• Make sure that you get mortgage preapproval from your lender. You’ll know exactly what you can afford, and sellers will know you have the funds to back your offer.

Alternatives to non-owner-occupied mortgages

Perhaps you’d like to make rental income while living in a unit within your home. You might consider options with more flexible credit requirements. Here are some alternatives to conventional investment property loans.

FHA loans

Federal Housing Administration loans have lower credit requirements, but they’re intended for primary residences. An FHA loan allows you to buy a home with up to four units. You can live in one and rent out the others. You’ll need a minimum 580 credit score and 3.5% down payment.

Additionally, you can convert a primary residence bought with an FHA loan to an investment property after meeting minimum occupancy requirements. This is usually a year, but the lender policy will be in your mortgage documentation. You can do the conversion after you meet minimum occupancy, but if you refinance, your lender will likely ask for rental info.

VA loans

Eligible military personnel, veterans, and their surviving spouses can use a Veterans Affairs loan to buy a home with up to four units with nothing down as long as they live in one of the units. There’s no minimum credit score set by the VA, but lenders set their own. Rocket Mortgage requires a 580 credit score.

The same conversion policies that apply to FHA loans apply to VA loans.

Debt service coverage ratio loans

Debt service coverage ratio (DSCR) loans have flexible qualification guidelines for borrowers who are self-employed or have complicated financial situations that make it difficult to qualify for traditional loans.

Your credit is checked, but most of the qualification comes from comparing your payment with the potential rental income you can generate from the property. These loans usually come with higher interest rates and larger down payment requirements, as well as prepayment penalties. Rocket Mortgage doesn’t offer DSCR loans at this time.

Portfolio or asset-based loans

Although not offered widely, lenders sometimes hold loans on their books instead of selling them to investors. This means lenders can be more flexible in terms of credit requirements and loan terms. This also may allow the lender to accommodate closing within a business structure.

FAQ

Having discussed the ins and outs, let’s touch on some other questions you may have.

Can I refinance my primary residence into a non-owner-occupied mortgage if I move out?

You can convert a primary residence or second home into an investment property if you meet the minimum occupancy requirements. Should you refinance, your lender will ask about rental income.

Are interest-only loans available for investment properties?

Rocket Mortgage offers a 40-year loan where you pay interest-only for the first 10 years, then pay a fixed-rate, fully amortized 30-year mortgage after that. This can provide flexibility, but you have to be sure you can afford the payment adjustment. Speak with a Home Loan Expert for further details.

How does property type affect non-owner-occupied mortgage rates?

Multiple units pose a greater risk to lenders than single-unit homes. It requires the borrower to find renters, which carries a potential risk of vacancies. There’s also a pricing adjustment for condos, typically because the lender needs to worry about the condo association’s financial health as well. Association amenities are part of your property value.

What is the impact of rental income on qualifying for a non-owner-occupied mortgage?

Projected rental income can only help you qualify because your lender can assume you’ll use it to make the mortgage payment.

Can I use a non-owner-occupied mortgage for a second home?

A second or vacation home is still considered owner-occupied because you still live in it part-time. Investment properties are non-owner-occupied because you don’t live there at all.

The bottom line: Non-owner-occupied mortgages can be a useful tool if you meet the requirements

Mortgage rates for non-owner-occupied homes are typically higher because these are investment properties. They can be risky for lenders because vacancies in rentals can affect the borrower’s ability to make payments. The same can be said for a property flip not going as planned. But they can be a good fit if you prepare and really go over your loan options.

If you feel confident in your plan and are ready to go, you can apply online with Rocket Mortgage.