What Is Conventional Loan?
A conventional loan is a mortgage not insured by the government. For investment properties, you typically need 15% down (single-family) or 25% down (2–4 units). If you put less than 20% down, you'll pay PMI until you reach 80% LTV. Conventional loans offer more flexibility than FHA for investment — no owner-occupancy requirement — but rates run a bit higher than owner-occupied conventional loans. Credit score matters: 740+ helps; below 680 may mean 25%+ down.
A conventional loan is a mortgage that isn't backed by the federal government — no FHA, VA, or USDA. Lenders sell the loan to Fannie Mae or Freddie Mac (conforming) or keep it in portfolio (non-conforming/jumbo).
At a Glance
- What it is: Mortgage not backed by FHA, VA, or USDA — sold to Fannie/Freddie or held in portfolio
- Investment down payment: 15% (single-family), 25% (2–4 units); house hack 2–4 unit: as low as 5%
- PMI: Required when down payment < 20% (LTV > 80%); removable at 80% LTV
- vs FHA/VA: No owner-occupancy requirement; PMI is removable; FHA has MIP for life on low down payment
- Conforming limit: $766,550 single-family in most areas (2024); above = jumbo, stricter rules
How It Works
Conventional loans are what most people think of when they say "mortgage" — a bank or lender funds the loan and either sells it to Fannie Mae or Freddie Mac (conforming) or keeps it (portfolio/jumbo). No government guarantee. That means stricter underwriting than FHA, but more flexibility for investors.
Down payment. For a pure investment property (you're not living there): 15% for single-family and condos, 25% for 2–4 units. If you're house-hacking — occupying one unit in a 2–4 unit — Fannie allows as low as 5% down. That's the owner-occupied exception.
PMI. If you put less than 20% down, your LTV is above 80%. Lenders require private mortgage insurance to protect them. You pay PMI until you hit 80% LTV (request removal) or 78% (automatic). Unlike FHA's MIP, conventional PMI goes away.
Credit and reserves. Credit score 740+ typically gets you the best rates and lowest PMI. Below 680, expect higher rates and possibly 25%+ down. Lenders usually want 6–12 months of reserves for investment properties — proof you can cover payments if the rental is vacant.
Conforming limits. Fannie and Freddie set max loan amounts. For 2024, $766,550 in most areas for a single-family. Above that, you're in jumbo territory — stricter underwriting, sometimes higher rates.
Real-World Example
Lisa: Investment condo in Tampa.
She buys a $280,000 condo as a rental. Conventional investment loan: 15% down = $42,000. Loan: $238,000. Her credit score is 755. Rate: 7.25%. PMI: $95/month (0.48% annually on the loan balance). Her PITI + PMI: $1,820. Rent: $2,100. After management, reserves, she nets ~$150/month. She's building equity. In 5 years, appreciation and principal paydown get her to 80% LTV. She requests PMI removal. Her payment drops $95. Cash-flow improves.
Tom: Fourplex, not owner-occupying.
He wants a $520,000 fourplex as a pure investment. Conventional: 25% down = $130,000. He doesn't qualify for the 5% house-hack option because he won't live there. His credit score is 698. Lender wants 25% down and 12 months reserves. He has it. He closes. Rate: 7.75% — a bit higher than Lisa's because of the lower score and investment classification.
Pros & Cons
- No owner-occupancy requirement — buy investment properties without living there
- PMI is removable — unlike FHA MIP, which can last the life of the loan
- No upfront mortgage insurance — FHA charges an upfront MIP at closing
- More property types — condos, 2–4 units, vacation homes; FHA has more restrictions
- Competitive rates — often better than FHA for borrowers with good credit score
- Higher down payment than FHA — 15–25% vs 3.5% for investment (FHA requires occupancy though)
- PMI adds cost when LTV > 80%
- Stricter underwriting — credit score, DTI, reserves all matter more
- Investment rates higher — typically 0.5–1% above owner-occupied conventional
- Reserves — 6–12 months of payments in the bank for investment loans
Watch Out
- Investment vs owner-occupied: Rates and terms differ. Don't mix them up when modeling.
- PMI removal: Request at 80% LTV — don't wait for automatic at 78%. You'll save months of payments.
- Reserves: Lenders count reserves differently. Some want PITI only; others include taxes, insurance, and estimated vacancy. Ask.
- Conforming limit: Check the limit for your county. High-cost areas have higher limits.
- Jumbo rules: Above conforming, underwriting tightens. Larger reserves, higher credit score expectations.
Ask an Investor
The Takeaway
Conventional loans are the workhorse for investment properties — no government backing, no owner-occupancy requirement. Plan for 15–25% down, factor in PMI if you're under 20%, and keep your credit score and reserves strong. For house-hacking, the 5% option on 2–4 units can beat FHA on cost long-term because PMI drops off.