With a few exceptions, the answer is no Part of the Series Federal Housing Administration (FHA) Loans Understanding FHA Loans
Low down payments and low credit score requirements make Federal Housing Administration (FHA) loans an attractive option for homebuyers who might not qualify for a traditional mortgage. While this may be good news for some homeowners, real estate investors looking to take advantage of the benefits of an FHA loan may need to look elsewhere. That’s because the conditions of these loans restrict those who qualify.
There are, however, ways in which some homeowners may be able to use an FHA loan for a property that also (or eventually) yields income.
Buying an investment property can be an exciting yet challenging endeavor, especially when it comes to financing. Many real estate investors consider FHA loans due to their lenient qualification requirements and low down payments. But can you actually use an FHA loan to purchase an investment property?
The short answer is yes, but with some key caveats. FHA loans are primarily intended for owner-occupied residences but they make exceptions for certain investment properties.
In this comprehensive guide, we’ll break down when and how an FHA loan can be utilized for real estate investing. We’ll also explore alternatives if an FHA loan isn’t the right fit.
Overview of FHA Loans
First, let’s start with a quick primer on FHA loans FHA stands for Federal Housing Administration – this government agency insures mortgages made by approved lenders
Some key features of FHA loans:
- Only 3.5% down payment required
- More flexible credit score requirements – as low as 500 FICO
- Lower mortgage insurance rates
- Limited closing costs
This makes them appealing, especially to first-time homebuyers. But how do they work for investors?
Using an FHA Loan for a Primary Residence Investment Property
The primary residence requirement is the biggest hurdle for using FHA financing on an investment property. Borrowers must move into the property within 60 days of closing and occupy it as their principal residence for at least 1 year.
However, the FHA makes an exception for “owner-occupied” units within a 2-4 unit building. For example
- You can purchase a duplex or triplex using an FHA loan.
- You must live in one unit as your primary residence.
- You’re then allowed to rent out the other unit(s).
So this strategy allows you to house hack by living in one unit while generating rental income from the others.
Just keep in mind that FHA guidelines limit this to a 4 unit property maximum. Anything larger than a 4 unit multifamily will not qualify.
Refinancing an Investment Property with an FHA Loan
What if you already own an investment property and want to refinance? Can you qualify for an FHA loan if you don’t live there?
Potentially, yes. The FHA offers streamline refinancing options that waive the owner-occupancy requirement under certain conditions, such as:
- You originally purchased the property as your primary residence using an FHA loan.
- You lived there for at least 1 year before renting it out.
- At least 210 days have passed since you became a landlord for that property.
If you meet the FHA streamline refi guidelines, you may be able to take advantage of today’s lower interest rates. Just be aware that you’ll be required to pay mortgage insurance for the life of the new loan.
Alternative Financing Options for Investment Properties
While FHA loans open some doors for real estate investors, they aren’t your only choice. Here are a few other options to consider:
Conventional Loans – Available for non-owner occupied investment properties. Typically require 20-25% down and solid credit/income.
Portfolio Loans – Offered by community banks/credit unions. May be more flexible than conventional loans.
Hard Money Loans – Provided by private lenders and real estate investors. Easy to qualify, but have high rates/fees.
Partnership Financing – Pool money with other investors to buy larger multifamily properties.
All Cash Purchase – Use your own funds or tap home equity to buy property outright.
Seller Financing – The seller carries back part of the mortgage. Easier to negotiate on smaller deals.
Evaluate each option carefully based on your own financial situation and investment strategy. An FHA loan can be a good fit for certain real estate investors, but it’s not the only path forward.
7 Key Tips for Using an FHA Loan to Purchase an Investment Property
If you’ve done your homework and decided an FHA loan is the right move, here are some tips to streamline the process:
1. Find an Experienced Mortgage Lender
Not all lenders handle FHA loans for investment properties. Find one with expertise in this niche.
2. Understand the One-Year Owner Occupancy Rules
Review FHA guidelines so you comply with living in the property for at least 12 months.
3. Expect to Pay Mortgage Insurance
FHA loans require mortgage insurance. Factor this into your budget.
4. Get Preapproved
Preapproval will make you a stronger buyer in competitive markets.
5. Inspect the Property Thoroughly
Hire a professional to check for issues that may require repairs.
6. Have a Property Management Plan
Prepare to handle tenant screening, rent collection, maintenance, etc.
7. Build an Emergency Fund
Keep cash reserves for unexpected expenses and vacancies.
Advanced planning and preparation will help set your investment property up for success.
The Bottom Line
FHA loans open unique opportunities for real estate investors who may struggle to qualify through conventional financing. If used strategically, they can provide a pathway to purchase your first rental property or expand your portfolio.
That said, FHA loans aren’t for everyone. Conventional mortgages and alternative options may better suit some investors. Carefully assess your situation before pursuing an FHA loan.
And as always, conduct thorough due diligence on any investment property you purchase – FHA financing or not. Look beyond the allure of low down payments to ensure it’s a sound long-term asset aligned with your real estate investing goals.
Some Exceptions
The FHA has special provisions that may allow you to earn rental income from your home. If your job requires you to relocate and you need a second home—or if your home is too small for your expanding family—then you may be able to rent out your first home after you’ve satisfied the one-year occupancy requirement. If you are off work because you’re otherwise incapacitated, you may be able to rent out rooms in your home to boarders to make up for lost wages.
Of course, you can always pay off the mortgage early. The FHA doesn’t charge any prepayment penalties, so if you can eliminate the loan in its entirety, then you are free to do whatever you wish with the property.
FHA Occupancy Requirement
Under FHA rules and guidelines, the property being financed must be occupied by the owner. This means that rental and seasonal properties do not apply. The FHA uses this rule to prevent investors from benefiting from the program.
The borrower must take possession of the home within 60 days after the mortgage closes, and they must live in the home for the majority of the year. The property must be used as a principal residence for at least one year. If there is more than one borrower listed on the mortgage, the FHA requires that at least one of them must satisfy the occupancy requirement.
The FHA doesn’t actually lend money for mortgages. Instead, loans are made by FHA-approved lenders, such as banks or other financial institutions.
How To Buy An Investment Property with an FHA Loan
FAQ
Can you assume an FHA loan as an investment property?
Can you convert an FHA loan to a rental property?
Can you do Airbnb with an FHA loan?
Can an investor use an FHA loan?
Can I use an FHA loan for investment?
Using FHA Loans for Investment: The key to using an FHA loan for investment is the commitment to treat one unit of a multi-unit property as your primary residence for at least a year. This means you must live in one of the units, turning the property into a primary residence before considering it for investment purposes.
Can FHA loans fund real estate investments?
Given their constraints, FHA loans are not typically used to fund real estate investments. As noted though, there are exceptions to the FHA investment property guidelines. Some investors will use an FHA loan to buy a multiunit or multifamily property of up to four units.
Can you buy a home with a FHA loan?
Many homebuyers use Federal Housing Administration (FHA) loans to buy single-family homes. FHA loans are popular with homebuyers because they have lower down payment requirements and more flexible credit qualification requirements, which make homeownership more affordable. You can also use FHA loans to buy an investment or rental property.
Can I use an FHA loan to buy a rental property?
While FHA loans are not intended for buyers who wish to finance an investment property, there are several ways an investor may be able to use an FHA loan to purchase a rental property. 1. Primary residence for 12 months
Can a first-time home buyer use an FHA loan?
Many first-time home buyers use an FHA loan for the same reasons, as well as assistance programs to lower closing costs and help with a down payment. FHA loans are also considered nonconforming mortgages because they don’t meet the standards of Fannie Mae or Freddie Mac for a property purchase. Can You Use An FHA Loan For An Investment Property?
Can I use an FHA loan for a property that yields income?
There are, however, ways in which some homeowners may be able to use an FHA loan for a property that also (or eventually) yields income. The Federal Housing Administration (FHA) insures mortgages that require a low down payment and have liberal underwriting standards. FHA loans are designed for borrowers to purchase a primary residence.