FHA vs. Conventional Loan for Your First Rental Property: The Real Math

3.5% down. That's the number that hooks first-time investors. On a $290,000 property, you're in for $10,150. Compare that to the $58,000 a conventional loan wants at 20% down, and the FHA loan looks like a no-brainer.

Until you run the full math.

FHA charges mortgage insurance for the life of the loan when you put less than 10% down. That's 30 years of payments you never get back. On the same $290,000 deal, we're talking roughly $362 more per month in insurance costs than a conventional loan with no PMI. Over three decades, that's real money walking out the door.

Here's the real question: are you owner-occupying or buying a pure rental?

The Real Question

FHA loans require you to live in the property as your primary residence for at least 12 months. Move in within 60 days of closing. Stay put. No exceptions for "I'll rent it out in six months."

If you're buying a duplex and living in one unit — house hacking — FHA is on the table. If you're buying a single-family to rent from day one, FHA isn't. Period. The financing guide walks through all your options; for pure investment properties, you're looking at conventional or DSCR loans.

So the comparison only matters when you're deciding how to finance a property you'll actually live in. Or when you're weighing house hack (FHA) vs. buy-and-hold rental (conventional) as your first move.

FHA: The Entry Play

Down payment: 3.5% with a 580+ credit score. That's $10,150 on $290,000. Your LTV is 96.5% — you're borrowing almost the whole thing.

Upfront MIP: 1.75% of the loan amount. On $279,850, that's $4,897. Usually financed into the loan, so you don't pay it at closing. But you're paying interest on it for 30 years.

Annual MIP: 0.55% when you put less than 5% down. Divided into 12 monthly payments. On $279,850, that's about $128 per month. And here's the kicker: with 3.5% down, MIP lasts the entire life of the loan. You don't get to drop it when you hit 20% equity like you do with PMI on a conventional loan.

DTI limit: 43% standard. Some lenders go to 47% with compensating factors — extra reserves, income growth potential. Your DTI ratio matters. Run the numbers before you apply.

Occupancy: Non-negotiable. You must occupy within 60 days. Stay 12 months minimum. No "I'll rent it in six months" — the FHA will audit. Violate the rule and you're looking at mortgage fraud. The appraisal will flag condition issues; FHA is pickier than conventional on property standards. Factor in contingencies and earnest money like any other deal — but know the bar is higher.

FHA wins on one thing: getting you in the door with less cash. If that's the constraint, it does the job. Just don't pretend the MIP is free.

Conventional: The Long Game

Down payment: For investment properties, 15–25% is typical. Lenders want 20–25% on single-family rentals. On $290,000, that's $43,500 to $72,500. More cash upfront. But you're building equity faster and — if you put 20% down — you avoid PMI entirely.

PMI: Only applies when you put less than 20% down. And unlike FHA's MIP, PMI goes away. Request cancellation when you hit 80% LTV (loan balance ÷ original value). It drops automatically at 78%. If your property appreciates, you can get a new appraisal after two years and potentially remove it sooner.

Credit: 620 minimum. For investment properties, 680+ is common. Best rates at 740+. Your credit score directly affects your rate and whether you qualify at all. Investment property rates run 0.25–0.75% higher than primary residence — lenders price in the risk. Plan for that when you run your numbers.

Occupancy: No requirement. Buy it. Rent it. You never have to live there. That's why conventional is the only option for pure rental purchases. No 12-month rule. No "intent to occupy" paperwork. You're an investor. The bank treats you like one.

Reserves: Most lenders want 2–6 months of PITI in reserves for investment properties. On a $232,000 loan at 7%, that's roughly $3,200/month P&I — so $6,400–$19,200 in the bank. They're not kidding. Have it before you apply.

The trade-off: you need more capital to start. But your total cost over 30 years is lower when you're not paying MIP forever.

The $290,000 Comparison

Let's put real numbers on it. Assume 7% rate, $290,000 purchase, owner-occupied (so both loans are options).

FHA at 3.5% down:

• Down payment: $10,150
• Loan: $279,850 (plus $4,897 upfront MIP financed)
• P&I: ~$1,862/month
• MIP: ~$128/month
• Total P&I + MIP: ~$1,990/month

Conventional at 20% down:

• Down payment: $58,000
• Loan: $232,000
• P&I: ~$1,543/month
• PMI: $0
• Total P&I: ~$1,543/month

Difference: $447 per month. Over 30 years, that's $160,920 in extra insurance payments on the FHA path. Even if you refinance out of FHA later, you've already paid years of MIP you can't get back. That's the real cost of 3.5% down. It's not a trick — it's math. Make sure the trade-off is worth it for you.

Conventional at 15% down (with PMI until 80% LTV): You'd pay PMI of roughly $85–120/month until you hit 20% equity. Still less than FHA's MIP, and it goes away. The math favors conventional on total cost almost every time — as long as you can scrape together the down payment.

Which One Fits You

Choose FHA if:

• You're house hacking (living in one unit, renting the other)
• You have limited cash and 580+ credit
• You're okay paying MIP for the life of the loan to get in with 3.5% down
• You'll owner-occupy for at least 12 months

Choose conventional if:

• You're buying a pure rental (no plan to live there)
• You have 15–25% down and 680+ credit
• You want to minimize long-term cost and eventually drop PMI
• You're thinking 5+ year hold and care about total dollars paid

The 12-month FHA occupancy rule isn't a suggestion. Lenders and the FHA take it seriously. If you're on the fence, run both loan scenarios with your actual numbers. The break-even point might surprise you.

Other paths: Seller financing can work when banks won't. DSCR loans qualify on the property's income, not your W-2. Both are worth a look if conventional and FHA don't fit.

One more wrinkle: FHA property standards are stricter than conventional. Peeling paint, broken handrails, roof issues — the appraisal can kill the deal. Sellers sometimes prefer conventional buyers because they know the bar is lower. If you're in a competitive market, that can matter. Factor it into your offer strategy.

Takeaway

FHA gets you in cheap. Conventional keeps more money in your pocket over time. Your best move depends on whether you'll live there and how much cash you've got. Run the numbers for your exact scenario — then pick the mortgage that matches the deal.

CTA

Ready to map out your financing options? The financing guide walks through conventional, FHA, DSCR, hard money, and creative strategies — so you can match the loan to your first rental. And if you're weighing house hack vs. pure rental, run both scenarios. The numbers will tell you which path makes sense for your situation.