5% Conventional Loans for Second Home/Investment Property?

Question

My fiancé and I are looking to buy a second home to STR or a multi family property to begin renting out. Our credit and income are great, but our down payment is small relative to our area when considering having to put down 10-15%. I have heard there are tons of 5% down conventional loans on BP but every lender I’ve talked to says that’s impossible. Can someone please point us in the right direction?

Daniel Hennek · Answer

Conventional loans are underwritten to Fannie or Freddie guides, they decide what is possible.  It's as simple as looking at Fannie Mae's and Freddie Mac's eligibility matrices.  Here is the link https://singlefamily.fanniemae...

You can see that conventional loans allow a 90% LTV on second homes.  If you have heard that "there are tons of 5% down conventional loans for investment properties" then you have heard wrong because there are exactly ZERO conventional loans that allow 5% down on an investment property or second home.  Hence, there is no direction to point you for a non existent program.  5% down conventional loans are for primary residence transactions only.  Follow the link, that is straight from Fannie Mae.  Freddie is identical with regards to LTVs in this case.  Fannie and Freddie decide what "conventional" loans can and cannot do and they have it all right there for anyone to see if you know where to look.  Lenders cannot make conventional loan requirements less strict.  They can add additional requirements called overlays but they CANNOT increase allowable LTVs.

Furthermore, Investment properties and second homes are NOT the same thing.  If you look at the link provided you'll see there's a big difference in the LTVs allowed for a "second home" vs and "investment property".  Additionally, you can only get 10% down on a second home if it's a 1 unit property.  You can get 15% down on a one unit investment property.  All 3-4 unit property conventional loans require 25% down.

Be careful calling an investment property a second home.  They are not the same and trying to play games like calling an investment property a second home is a specific type of mortgage fraud called occupancy fraud and it's pretty easy to spot from a lenders standpoint.  A second home is one that you will occupy part of the year as a secondary residence and not rent out to others.

Long story short, investors are not getting 5% down on conventional loan investment properties.  Best advice is to stop looking for something that doesn't exist and re-evaluate your plans.  Wherever you heard what you heard you either misinterpreted, or it was flat out wrong.  Post a link here if you'd like someone to look at what you saw, but there's no doubt in what I'm saying...you heard wrong.

As far as portfolio loans or private money.  Well those people can do whatever they want, but none of them who actually know what they're doing are offering 5% down an investment property.  Too much risk.  If you want a 5% down loan on an investment property you're going to need to find a friend who'll loan you the money.

Will Fraser · Answer

Hi @Luca Hillers, and welcome to the BiggerPockets forums!

The problem here is that Conventional loans (on a primary residence) and Conventional loans on a secondary residence as two different things.  On your primary residence you can do 5% down, but on a vacation home you will need to do 10% or an alternative loan type (which almost certainly will not lower the down payment requirement).

This 10% down program is actually an improvement over the 15-25% down that conventional lenders charge on other non-owner-occupied homes (like rental properties), so in that way it is a kindness to us would-be-vaction-home-owners.

Jaron Walling · Answer

@Luca Hillers My local lender requires 20% down on investment properties so be happy you can do 10-15%. I'd take what you see or hear on BP with a grain of salt. An investor getting a 5% probably has connections with the lender, it's a portfolio loan, or they're using commercial lending terms. For someone like you and I that's not easy or even possible in my situation given my experience and capital.

5% Conventional Loans for Second Home/Investment Property?

Most Popular Reply