Exploring the Differences Between Conventional and Investment Loans

26 February 2026

When diving into the world of real estate financing, you'll quickly realize that not all loans are created equal. If you're buying a home to live in, you might opt for a conventional loan. But if you're looking to expand your portfolio as an investor, an investment loan is the way to go. But what exactly sets these two apart?

Understanding the differences between conventional and investment loans is crucial to making the right financial decision. So, whether you're a first-time homebuyer or a seasoned investor, this guide will break it all down for you—without the confusing financial jargon.

What Is a Conventional Loan?

A conventional loan is a mortgage that is not backed by a government agency like the FHA, VA, or USDA. It's one of the most common types of home loans and is typically used for primary residences—homes that borrowers plan to live in.

These loans come in two forms:

- Conforming Loans – These meet the loan limits set by Fannie Mae and Freddie Mac, the two major government-sponsored enterprises (GSEs).
- Non-Conforming Loans – These don’t meet those limits and can include jumbo loans for higher-priced properties.

If you're looking to buy a home for yourself, chances are you'll be dealing with a conventional loan.

What Is an Investment Loan?

An investment loan, on the other hand, is designed for individuals who want to buy rental properties, fix-and-flip homes, or purchase real estate strictly for income-generating purposes.

Since lenders see investment properties as riskier, these loans often come with:

- Higher interest rates – Because investors are considered more likely to default compared to homeowners.
- Stricter approval requirements – Expect lenders to demand a higher credit score and a larger down payment.
- Different loan terms – Some may have shorter repayment periods compared to traditional mortgages.

If you're looking to grow your wealth through real estate, an investment loan is the tool you'll need.

Key Differences Between Conventional and Investment Loans

Now that we’ve covered the basics, let’s talk about the major differences between these two loan types.

1. Purpose of the Loan

- Conventional Loan → Used for purchasing a primary residence or, in some cases, a second home.
- Investment Loan → Used for buying rental properties or real estate intended for generating income.

2. Loan Approval Requirements

Since lenders view investment properties as a higher risk, the approval process is stricter. Here’s how they compare:

| Criteria | Conventional Loan | Investment Loan |
|------------------|---------------------------------|---------------------------------|
| Credit Score | 620+ (sometimes lower) | 680+ (often required) |
| Down Payment | 3-5% for first-time buyers | 15-30% or more |
| Debt-to-Income | 43% or lower | Often lower than 40% required |

Investment loans require a stronger financial profile, meaning you'll need a higher credit score, larger down payment, and lower debt-to-income (DTI) ratio to qualify.

3. Interest Rates

Lenders assume that if financial trouble hits, investors are more likely to stop paying on an investment property before their own home—making them riskier borrowers.

As a result, interest rates on investment loans are typically 0.5% to 1% higher than those on a conventional mortgage.

For example:

- Conventional Loan Interest Rate: 6.5%
- Investment Loan Interest Rate: 7.5%

While one percentage point may seem small, it adds up to thousands of dollars over the life of the loan.

4. Down Payment Differences

If you're buying a home to live in, some conventional loans let you put as little as 3% down—especially if you qualify for first-time homebuyer programs.

For an investment property, however, lenders usually require at least 15-20% down, and sometimes even more.

Why? Because they want to ensure investors have “skin in the game.” The higher the down payment, the less risky the loan is for the lender.

5. Loan Terms and Repayment Periods

Most conventional loans come with fixed 15-year or 30-year terms, meaning borrowers have predictable monthly payments.

Investment loans, though, may have shorter terms (such as 5, 10, or 15 years) or even adjustable-rate mortgages (ARMs), which come with fluctuating interest rates after a certain period.

6. Income Verification

For conventional loans, lenders mainly look at:

✔️ Your employment history
✔️ W-2s or pay stubs
✔️ Tax returns

Investment loans, however, require more financial documentation, including:

✔️ Rental income projections
✔️ Property cash flow analysis
✔️ Personal financial statements

Lenders want to know whether the property will generate enough income to cover mortgage payments and expenses.

7. Available Loan Programs

With conventional loans, borrowers can access FHA, VA, and USDA loan programs if they qualify. These government-backed loans offer lower down payments and competitive interest rates.

But when it comes to investment loans, buyers won’t qualify for government-backed assistance since these programs are meant for primary residences.

Instead, investors typically rely on:

- Conventional investment property loans
- DSCR (Debt Service Coverage Ratio) loans
- Hard money loans
- Commercial loans

These alternative financing options can have different requirements, but they’re designed specifically for real estate investors.

Which Loan Should You Choose?

The right loan depends entirely on your goals.

- If you're buying a home to live in, a conventional loan is the way to go.
- If you want to purchase rental properties or flip homes, you’ll need an investment loan.

Before making a decision, ask yourself:

✔️ Do I plan to live in this home, or is it purely for income?
✔️ Can I afford the larger down payment required for investment loans?
✔️ Do I have a strong credit score and financial profile?

The answers to these questions will steer you in the right direction.

Final Thoughts

Understanding the differences between conventional and investment loans is key to making smart real estate decisions. Both have their benefits and challenges, but the right loan for you depends on your financial goals.

If you're buying a home for yourself, a conventional loan offers lower rates and flexible terms. But if you're looking to build wealth through real estate, an investment loan gives you the power to generate long-term passive income.

Whatever route you choose, make sure to work with a trusted lender who can guide you through the process and help you secure the best deal possible.