What actually replaces the 20% down payment

You can buy investment property with less than 20% down, but you will pay more in interest, insurance, and fees to do it. The lender shifts risk onto you instead of requiring you to absorb it upfront. The most common routes are FHA loans (which allow 3.5% down but have strict property rules), conventional loans with private mortgage insurance (10–15% down, PMI added to your payment), portfolio loans (held by the lender, not sold, with flexible terms), and cash-out refinancing on a property you already own.

Each method has real costs and real limits. A 10% down payment on a $300,000 property sounds like you are saving $30,000, but you will pay roughly $200–$400 more per month in PMI alone, plus higher interest rates. Over 30 years, that adds up to $72,000–$144,000 in extra cost. The math only works if the rental income covers those extra payments and you plan to hold the property long enough for the PMI to drop off or the property to appreciate.

Key Takeaways

  • FHA loans allow 3.5% down on investment properties but require the property to meet federal standards and limit you to one owner-occupied unit if you have multiple properties.
  • Conventional loans with PMI let you put down 10–15% but add $200–$400 monthly to your payment and require PMI to stay until you reach 20% equity.
  • Portfolio loans are held by the lender instead of sold, so they have flexible terms and lower down payment requirements but are harder to find and usually cost more in interest.
  • Cash-out refinancing lets you borrow against equity in a property you already own to fund a down payment on a new investment property.
  • Seller financing, partnerships, and home equity lines of credit are less common but possible routes if traditional lenders turn you down.

FHA loans for investment property

FHA loans allow 3.5% down on investment properties, but the rules are strict. The property must be a single-family home, duplex, triplex, or fourplex, and it must meet FHA property standards—no major structural damage, no unpermitted additions, no lead paint hazards without disclosure. The appraisal is more thorough than a conventional appraisal, and the lender will reject properties that fail inspection.

The bigger limit is that you can only have one FHA loan at a time for an owner-occupied property. If you already own a home with an FHA mortgage, you cannot get another FHA loan for an investment property unless you refinance the first one into a conventional loan. If you are buying your first investment property and do not own a home, FHA is worth exploring, but talk to the lender about property restrictions before you make an offer.

FHA loans also require mortgage insurance for the life of the loan if you put down less than 10%. If you put down 10% or more, the mortgage insurance drops off after 11 years. The insurance premium is 0.55% of the loan amount annually, added to your monthly payment.

Conventional loans with private mortgage insurance

A conventional loan with 10–15% down is the most common path for investment property. The lender approves the loan, you make a smaller down payment, and private mortgage insurance (PMI) protects the lender if you default. You pay the PMI premium—usually 0.5% to 1.5% of the loan amount per year—as part of your monthly payment.

PMI stays on your loan until you reach 20% equity through a combination of payments and appreciation. If you put down 10% on a $300,000 property, you need the property value to stay at $300,000 and you need to pay down the loan to $240,000 before PMI drops. That takes roughly 8–12 years depending on interest rates and your payment schedule. You can request PMI removal once you hit 20% equity, but the lender will not remove it automatically.

Interest rates on conventional loans with less than 20% down are typically 0.25–0.5% higher than loans with 20% down. Combined with PMI, your total monthly cost is substantially higher. Run the numbers with your lender before you commit: compare the 10% down scenario (with PMI and higher rate) against waiting to save 20% down.

Portfolio loans and lender-held mortgages

A portfolio loan is a mortgage the lender keeps instead of selling to an investor. Because the lender holds the risk, they can set their own terms. Many portfolio lenders allow 15% down or even 10% down on investment property, with no PMI and more flexible property requirements. Some will lend on properties that do not meet conventional or FHA standards—older homes, properties needing work, or unusual structures.

The tradeoff is cost and availability. Portfolio loans usually carry interest rates 0.5–1% higher than conventional loans, and you will pay an origination fee of 1–2% of the loan amount. Portfolio lenders are smaller banks, credit unions, and private lenders, not the national mortgage companies. Finding one requires calling local banks and asking whether they hold loans in portfolio.

Portfolio loans are worth exploring if you have been turned down by conventional lenders, if the property does not meet FHA or conventional standards, or if you want to avoid PMI and can absorb the higher interest rate. The monthly payment will still be higher than a 20% down conventional loan, but you avoid the PMI penalty.

Cash-out refinancing to fund a down payment

If you already own a home or rental property with equity, you can refinance it and take out cash to use as a down payment on a new investment property. This is called a cash-out refinance. You borrow more than you owe on the existing property, pocket the difference, and use that cash for the new down payment.

The math works like this: you own a home worth $400,000 with a $250,000 mortgage. You refinance for $300,000, pay off the old mortgage, and walk away with $50,000 in cash. You use that $50,000 as a down payment on a $250,000 investment property. Your original home now has a higher mortgage balance, so your payment goes up, but you have funded the new down payment without saving additional cash.

The risk is that you are increasing debt on a property you already own. If the new investment property does not generate enough rental income to cover both the higher payment on the refinanced home and the new mortgage, you are paying the difference out of pocket. Lenders will also require that your total debt-to-income ratio stay below 43–50%, so if you already have high debt, you may not may have access to for both mortgages.

Seller financing and owner-financed deals

In a seller-financed deal, the property owner acts as the lender. You make a down payment directly to the seller (which can be as low as 5–10%), and the seller finances the rest. You make monthly payments to the seller instead of a bank. Seller financing is most common in rural areas, for properties that do not may have access to for bank loans, or when a seller is motivated to move the property quickly.

The advantage is flexibility: the seller can accept a lower down payment and may not require an appraisal or credit check. The disadvantage is that interest rates are often higher (8–12% instead of 6–7%), and the seller can include a due-on-sale clause that requires you to pay off the entire loan if you sell or refinance. You also have no lender protection if the deal goes wrong—you are negotiating directly with the seller and may need a real estate attorney to draft the contract.

Seller financing works best when you have a relationship with the seller or when the property is unique and hard to finance through a bank. Always have an attorney review the contract before you sign.

Partnerships and co-ownership structures

If you do not have enough cash for a down payment, you can partner with another investor or family member. One person puts down the down payment, the other covers closing costs or contributes cash later, and you both own the property and share the mortgage obligation. This is a co-ownership or partnership structure.

The legal setup matters. You can hold title as tenants in common (each person owns a percentage and can sell their share independently), as joint tenants (both owners have equal rights and the property passes to the survivor if one dies), or through an LLC or partnership agreement. Each structure has different tax and liability implications, so consult a real estate attorney before you buy.

The risk is that if your partner stops paying or wants out, you are both still liable to the lender. The lender will pursue both of you for the full loan amount if either of you defaults. Make sure you trust your partner and have a written agreement about what happens if one person wants to sell or if the property loses value.

Home equity lines of credit and second mortgages

If you own a home with equity, you can open a home equity line of credit (HELOC) or take out a second mortgage to borrow cash for a down payment. A HELOC works like a credit card—you borrow what you need, pay interest only on what you use, and can draw more as you pay it down. A second mortgage is a fixed loan against your home equity.

HELOCs typically have lower interest rates than personal loans or credit cards (6–9% depending on the market), but your home is collateral. If you cannot pay back the HELOC, the lender can foreclose. You also have two monthly payments now—one on your primary mortgage and one on the HELOC—which increases your debt-to-income ratio and may disqualify you from the investment property mortgage.

This route works if you have significant home equity, a strong income, and a clear plan to pay back both the HELOC and the new investment mortgage. Run the numbers with your lender to make sure your total debt-to-income ratio stays within their limits.

Frequently Asked Questions

What happens to my monthly payment if I put down 10% instead of 20%?

Your payment increases by roughly 10–15% because you are borrowing more and paying PMI. On a $300,000 property at 7% interest, the difference between 10% down and 20% down is about $250–$350 per month, including PMI. That adds up to $3,000–$4,200 per year.

Can I remove PMI before I reach 20% equity?

No. PMI stays on your loan until you reach 20% equity through payments and property appreciation. You can request removal once you hit that threshold, but the lender will not remove it automatically. Some lenders allow removal after 5 years if you have made on-time payments, but this varies by lender.

Is a portfolio loan better than a conventional loan with PMI?

It depends on how long you plan to hold the property. A portfolio loan has a higher interest rate (0.5–1% more) but no PMI. A conventional loan with PMI has a lower interest rate but PMI stays for 8–12 years. If you plan to hold the property for 10+ years, the portfolio loan may cost less overall. If you plan to sell or refinance within 5 years, the conventional loan is usually cheaper.

Can I use a HELOC to cover the down payment and still get approved for the investment mortgage?

Yes, but it counts against your debt-to-income ratio. The lender will add your HELOC payment to your existing debts when they calculate whether you can afford the new mortgage. If your total debt payments exceed 43–50% of your gross income, you will not may have access to. Ask your lender to run the numbers before you open the HELOC.

What if the seller offers to finance the property—do I still need a down payment?

Usually yes, but it is negotiable. Most sellers expect 5–10% down, but some will accept less if you have a strong credit score or if they are motivated to sell. The interest rate and terms are also negotiable. Always have an attorney review a seller-financed contract before you sign.