How to Get an Investment Property Loan in 9 Steps

Need financing to acquire an investment property like an apartment building, office complex, industrial lot, warehouse, retail venue, multifamily property, mixed-use building, or vacation rental? The process involved will require nine key steps.

Learn what to expect and how to prepare for these steps well ahead of time so that you’ll be ready, which can improve your odds of getting approved for an investment property loan.

Understanding investment property loans

Investment property loans are a type of financing used to purchase properties that will be used for generating income, such as rental, commercial, retail, or mixed-use properties, rather than as a primary residence. These loans are similar to traditional mortgage loans, where the property acts as collateral for a long-term, low-interest loan.

However, investment property loans may require a higher down payment and come with higher interest rates than loans for owner-occupied properties. This is because lenders consider investment properties to be riskier since the borrower's ability to generate income from the property is not guaranteed.

A variety of financial institutions, including banks, credit unions, mortgage lenders, and private lenders, provide investment property loans. Each lender may have distinct criteria for qualification and may provide different rates and terms. It's essential to compare offers from multiple lenders to identify the best option for your particular investment property objectives and financial status.

9 Steps to Get an Investment Property Loan

The process involved with obtaining and using an investment property loan is often similar to what is required when pursuing a primary mortgage residential loan. These steps can vary depending on the lender and the type of loan but generally include the following.

The steps required to get an investment property loan are:

Step 1: Determine your investment property goals

Decide on the type of property you want to purchase, its location, and the potential income you can generate. This will help your lender evaluate the level of risk associated with your investment and ensure that the property has the potential to generate enough income to repay the loan.

Having a clear investment strategy and understanding the potential income of the property can also help you choose a property that aligns with your goals and increases your chances of being approved for a loan. Case in point: Buying a multi-unit or commercial property may offer higher income potential compared to a single-family home.

Additionally, the location of the property is a major factor in determining its income potential. Properties located in high-demand areas with strong rental markets and economic growth potential are generally considered lower risk by lenders.

Step 2: Check your credit score

Your credit score is an essential factor in your loan application evaluation. The higher your credit score, the better your odds of getting a lower interest rate and an investment loan with more favorable terms. Check your credit score with your bank, credit card, or a via an online resource like Experian.com. Many investment property lenders require a credit score of 680 or higher. If you’ve checked your score and learned that it is lower than desirable, you should work to improve your score well before applying for a loan by paying all your bills on time, paying down your collective debt, paying more than just the minimum amount due every month on debts, and not opening or closing any new loans or credit lines.

Step 3: Gather financial documents

To be eligible for an investment property loan, you will likely need to provide several crucial financial documents and substantiation. Prepare to furnish proof of income via paystubs, tax returns, and W-2 forms; bank statements, which are needed to verify your income and evaluate your overall financial situation; tax returns from the past two years to indicate your tax liabilities; information about the investment property you intend to purchase; and business documents, including a business plan and/or profit and loss statements. Note that your lender may also access your credit reports behind the scenes to assess your creditworthiness.

The particular documents required may fluctuate based on the lender and the type of loan you are applying for, so it's important to ask the lender and be prepared to furnish all necessary documentation promptly, which can improve your chances of being approved.

Step 4: Shop for lenders

To find the right lender for your investment property loan, it's always best to shop around among many different funding sources, including banks, credit unions, mortgage lenders, and private lenders. Analyze their websites, customer reviews, and ratings to gain insight into their terms, requirements, and rates. Next, compare interest rates and terms carefully. 

Remember that, while the APR is important, consider other factors like the loan term, fees, and associated expenses. Evaluate loan requirements, too, from the credit score and debt-to-income ratio required to the minimum down payment needed. Ensure that you understand and can fulfill these requirements, and ask questions about anything you don’t understand.

Step 5: Submit a loan application

Once you’ve narrowed down your list to a preferred lender, complete an online application or submit a paper application through the mail or in person at a brick-and-mortar lender location. Be prepared to provide personal and financial information as requested.

Step 6: Get pre-approved

If you qualify, the lender may pre-approve you for a loan amount based on your financial information. This can give you a leg up on rivals vying for the same investment property that may not yet be preapproved.

The length of time required to obtain pre-approval for an investment property loan can vary from a few hours to a few weeks, depending on the lender's requirements and how you apply. Online applications could receive instant decisions, while applications sent through the mail or in person may take longer to process. 

If you have a complex financial situation, like having numerous debts or income sources, or if the property you're considering has unique features, it may take the lender longer to evaluate your application and provide pre-approval. Once pre-approved, the lender will provide you with a pre-approval letter that states the maximum loan amount you are eligible to receive. This letter will be valid for a specific period, usually 90 days.

Step 7: Appraise the property

The lender will probably require an appraisal of the property to determine its value and ensure it meets its lending stipulations. The lender will choose its own appraisal professional, but you – the borrower – will need to pay for the appraisal (as part of your closing costs). The appraiser will visit the property and conduct a visual inspection of the interior and exterior of the property. 

Following the appraisal, you and the lender will receive a written report that includes an estimate of the property's market value, based on its size, location, condition, and comparable sales in the area. This report will be used by the lender to decide the loan amount and interest rate you qualify for.

Step 8: Finalize and close on the loan

After your appraisal, the lender will finalize the loan. Closing will be scheduled and occur, during which you’ll sign all final paperwork, pay closing costs as necessary, and receive the funds for the property purchase (either on the same day or within a few days of closing).

Step 9: Make payments

By this point, the good news is that your loan is a done deal—approved and closed. Now, it’s time to make consistent monthly payments on time, before the due date, to avoid late fees, maintain a good credit score, and bypass the risk of foreclosure.

Tips to Qualify for an Investment Property Loan

Real estate investor Mike Qiu, owner of Good As Sold Home Buyers, says you can shift the odds in your favor of getting approved for an investment property loan with better terms by following best practices.

“Maintain a good credit score and a low debt-to-income ratio, have a solid financial plan and a clear strategy for generating income from the property, and shop around and compare rates and terms from many different lenders,” he suggests. “Be careful not to misrepresent your income or assets on the loan application, too.”

Additionally, “avoid making any large purchases that have a large monthly payment prior to applying for an investment property loan. Don’t run your credit for any other type of financing, either,” advises Bobby Atkisson, senior vice president with Nationwide Home Loans Group.

How Long It Takes To Get an Investment Property Loan

The timeline for obtaining an investment property loan can be different from lender to lender and based on the financing vehicle. But it often takes 30 to 60 days (sometimes 90 days or more) from the date of submitted application to the date of approval/funding.

The bottom line

Don’t underestimate the work involved with these steps required to obtain an investment property loan. This is a major financial transaction that will take time to process, review, and underwrite on the lender’s part, so allow yourself plenty of slack without trying to rush matters.

Lastly, before committing to an investment property loan, thoroughly ponder the prospective risks and rewards of this investment.