A Guide to Using FHA Loans for Investment Properties

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.

As a real estate investor, I’m always exploring different financing options for rental properties. One route many investors overlook is FHA loans. While they aren’t designed for buying investment properties, FHA loans offer some intriguing possibilities if used strategically.

In this comprehensive guide, I’ll explain when and how FHA loans can work for real estate investors.

Overview of FHA Loans

FHA loans are government-backed mortgages insured by the Federal Housing Administration (FHA). They help make homeownership more accessible by requiring lower down payments and credit scores versus conventional loans.

Some key features

Down payments as low as 3.5%
Available with credit scores starting at 580
Lower mortgage insurance premiums than conventional loans

Due to the easier eligibility requirements, FHA loans are extremely popular with first-time homebuyers. But savvy real estate investors can also benefit in certain situations.

FHA Occupancy and Investment Property Rules

The main catch is that FHA loans require you to live in the property as your primary residence So they aren’t intended for pure investment properties where you don’t personally occupy the home

However, there are some exceptions that create opportunities for investors:

Live in a Multi-Unit Property – FHA loans can be used to purchase a duplex, triplex, or quadplex property where you live in one unit and rent the others

Temporary Rentals – If you move out of an FHA-financed home after living there for at least 12 months, you can rent it out temporarily.

Refinance Options – Once you’ve lived in the home for over a year, FHA streamline refinancing allows you to refinance into a conventional loan and remove occupancy requirements.

Using FHA Loans to Purchase Multi-Unit Properties

One way real estate investors tap into FHA financing is by purchasing a small multi-unit property of 2-4 units.

The strategy is to live in one unit as your primary residence while renting the other units for income. Here are some tips for going this route successfully:

Make sure the rents cover the mortgage – Factor in the rental income you’ll receive to confirm the property cash flows.
Screen tenants thoroughly – Being selective upfront prevents headaches with problem tenants.
Set aside reserves for maintenance – Plan for expenses like roof repairs or new HVAC systems.
Refinance once you hit 20% equity – After a few years, you may be able to refinance into a conventional loan and remove FHA occupancy rules.

The main drawback of this approach is you need to live on-site as your primary home. But for investors who don’t mind residing in one unit, it can be an effective way to purchase investment properties with an FHA loan.

Refinancing FHA Loans on Investment Properties

Another option for tapping FHA financing is to refinance an existing investment property or second home using an FHA cash-out refinance.

This can make sense if you:

Already have at least 20-25% equity
Need to pull cash out for renovations or other expenses
Want to lock in a lower interest rate

Just make sure you research FHA cash-out guidelines in detail first. And remember, you’ll need to move into the property for at least a year before doing an FHA refinance.

Alternatives to FHA Investment Property Loans

While FHA loans present some opportunities for real estate investors, they aren’t always the best fit. Here are a few alternatives to consider:

Conventional Investment Loans – These typically require 20-25% down and solid credit, but don’t have occupancy requirements.

Hard Money Loans – If you need quick financing or have credit challenges, hard money loans are an option albeit with higher rates/fees.

Partners/Private Lenders – Joining forces with an investing partner or private lender is another creative way to fund deals.

All Cash – Ideally, having enough cash to purchase properties outright maximizes your flexibility.

The Bottom Line

FHA loans likely won’t be your go-to choice for financing investment properties. But smart real estate investors should still understand how they potentially could be used strategically.

If you’re willing to live on-site for 12+ months, FHA loans present some unique opportunities. Or you may be able to refinance into an FHA loan temporarily to access benefits like lower rates.

While not ideal for all situations, FHA investment property loans can be an arrow in your real estate financing quiver in certain circumstances.

fha investment property loans

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.

Refinancing an Existing FHA Loan

Suppose someone uses an FHA loan to finance the purchase of a primary residence. Let’s say the owner then moves out of the home for one of the reasons listed above, but continues to own it and rent it out for income. In other words, the house becomes an investment property. Suppose also that interest rates drop, and the owner wants to refinance through the FHA for a better deal.

Even though the homeowner no longer lives in the house, FHA rules allow them to refinance into another FHA loan. An FHA-to-FHA refinance is also known as an FHA streamline refinance. There are several requirements to qualify for refinancing including:

A minimum of 210 days must have passed since you closed your original home loan.
You must have made at least six on time monthly payments on your FHA-issued mortgage.
Payments for all mortgages on the property for the past 6 months before receiving a FHA case number must have been paid within the month they were due
You may not have more than one 30-day late payment within the last six months for all mortgages on the property.
The refinance must lower your monthly principal and interest payments, which is often described as a net tangible benefit. The qualifications to meet a net tangible benefit depends on the type of mortgage you are refinancing to and from, such as a fixed rate to an adjustable rate mortgage or vice versa. Refinancing into a mortgage with a shorter term also qualifies as a net tangible benefit.

If a homeowner meets the criteria above, FHA streamline refinances are quite possibly the easiest loans to close. They require no employment or income verification, no credit score verification, and no home appraisal. The main thing that matters is that the homeowner has made their existing FHA loan payments on time.

Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps that you can take. One is to file a report with the Consumer Financial Protection Bureau (CFPB) or HUD.

WATCH THIS Before Buying Your First Multifamily Rental Property with an FHA Loan!

FAQ

Is an FHA good for rental property?

It cannot be used to finance a second home, a rental home, a vacation home, or an investment property. That said, there are some exceptions. You can use an FHA loan to purchase up to a four-unit dwelling, as long as you live in one unit as your primary residence. Then you can rent out the other units for income.

Can an investor get a FHA loan?

You can also use FHA loans to buy an investment or rental property. There are two important restrictions to understand, however. The first is that the property can have no more than four rental units total. The second is that you need to occupy one of the units in the property as your primary residence.

Can you assume an FHA loan as an investment property?

In short, you can use an FHA loan for an investment property if you’re willing to live there. For example, a real estate investor could purchase a fourplex, live in one unit, lease the other units out and get a return on investment from the rental payments they collect.

Can you do Airbnb with an FHA loan?

FHA loan rules do not permit rentals of living units in the home purchased with an FHA mortgage if those rentals are for less than 30 days. The Airbnb business model is not acceptable under FHA loan rules, which means that if you purchase with an FHA mortgage, Airbnb operations are a violation of the FHA loan rules.