Renting Out Your House With an FHA Loan: Rules, Tips and What to Know

The FHA loan program helps make homeownership attainable for many buyers by requiring lower down payments and credit scores than conventional loans But can you rent out a property financed with an FHA loan?

The answer is yes in certain situations. FHA guidelines do allow homeowners to rent out their properties under specific circumstances.

In this comprehensive guide, we’ll explain:

• FHA occupancy rules and when rentals are permitted
• How to rent your primary residence after living there
• Using FHA loans to buy multi-unit properties
• Tips for managing an FHA investment property
• Refinancing to conventional loans for more flexibility
• Risks and downsides of renting with FHA financing

Follow along for everything you need to know about renting out a home purchased with an FHA mortgage.

FHA Owner Occupancy Rules

The number one FHA guideline is that the property must be your primary residence. As the name implies, Federal Housing Administration loans are meant for owner-occupied homes.

So you can’t simply buy an investment property for the sole purpose of renting it out from day one.

However, FHA does allow for a few exceptions that make rentals possible after meeting certain qualifications.

When Can You Rent an FHA-Financed Property?

Renting out the full property is permitted in limited scenarios:

After Living There for One Year

FHA requires you to move into the home within 60 days of closing and live there as your primary residence for at least 12 months.

Once you’ve met the one-year minimum occupancy, FHA allows you to rent out the property in full. Reasons for renting at this point may include:

• Job relocation
• Major life changes like marriage or divorce
• Financial hardships forcing you to move

As long as you lived in the home for 1 year initially, FHA will permit you to start earning rental income after that term.

Purchasing a Multi-Unit Property

One way FHA allows investors to rent out properties is by financing multi-unit buildings of 2-4 units.

As long as you live in one of the units as your primary residence, you can rent out the remaining units from the start.

So with a 4-plex purchased with FHA, you could live in one unit and rent the other three immediately with no waiting period.

Converting to a Rental After Refinancing

Refinancing an FHA loan to a conventional mortgage removes FHA restrictions. Once you switch lenders, you can rent the home even without ever living there yourself.

We’ll discuss how refinancing opens more rental possibilities later in this guide. First let’s look at managing a property rented under current FHA guidelines.

Tips for Renting Your FHA Primary Residence

Renting your primary home after living there for a year or using an FHA loan to buy a multi-unit rental property both allow you to generate income from tenants. Here are some tips for effectively managing FHA investment properties:

• Screen tenants thoroughly – Tenant qualifications are extremely important. Vet applicants carefully to find reliable renters that will pay on time.

• Follow fair housing laws – Don’t discriminate against tenants. Follow all federal, state, and local fair housing practices when reviewing applications.

• Consult a landlord/tenant attorney – Have an experienced real estate lawyer review your lease agreement to protect your rights as a landlord.

• Set aside reserves for maintenance – Be ready for repairs and maintenance costs by putting some rental income into savings each month. Vacancies will also impact your cash flow.

• Hire a property manager – If you move out of state or don’t want hands-on involvement, work with a property manager to handle oversight.

• Keep immaculate records – Track all rental income and expenses, maintenance logs, tenant histories, etc. to prove you’re engaged in actively renting if FHA audits your occupancy status.

Refinancing FHA Loans to Rent Out Properties

As mentioned, refinancing an FHA loan into a conventional mortgage removes FHA owner-occupancy rules.

You can convert to a conventional loan once you have 20% equity either through natural appreciation or improvements made to the property.

Benefits of refinancing into a conventional loan include:

More Flexibility to Rent Immediately

Refinancing means you are no longer bound to FHA guidelines. You can immediately turn the property into a long-term rental without ever living there yourself.

Better Loan Terms and Interest Rates

Conventional loans often come with lower interest rates, allowing you to reduce your monthly payments. You can also likely remove private mortgage insurance with 20% equity.

Tap Home Equity for Fixes

A cash-out refinance lets you pull equity out to fund renovations that allow you to charge higher rents. Or use the cash for a down payment on another investment property.

Deduct Interest on Investment Homes

With a conventional loan, the IRS lets you deduct interest on up to two investment properties on your taxes. FHA interest isn’t deductible.

Risks and Downsides of Renting with FHA

While FHA does allow some flexibility to rent, there are risks and downsides to be aware of:

• You must always occupy the property for at least one year initially.

• Renting sooner than 12 months can be considered mortgage fraud.

• You may have to pay private mortgage insurance for the full loan term with an FHA mortgage.

• Interest and property taxes aren’t deductible on your income taxes while it’s your primary residence.

• Maintenance and repairs made during your occupancy period aren’t deductible expenses.

• FHA loans require you to personally pay the mortgage even if tenants stop paying rent.

• FHA has stricter occupancy audit practices than conventional lenders. Make sure to document your occupancy.

The Bottom Line

It is possible to rent out a property financed with an FHA loan, but you need to follow program guidelines. In most cases, you’ll need to live in the home as your primary residence for at least 12 months first.

Purchasing a multi-unit property and occupying one unit yourself also allows you to collect rental income on FHA financing.

Overall, FHA loans can be a good starting point for real estate investors who want to house hack or just need low down payment options. But refinancing to conventional loans down the road provides much more flexibility.

If you’re considering purchasing an investment property with an FHA loan, make sure to understand the program’s occupancy rules, risks, and alternatives. With proper planning, this financing can help you achieve your real estate investing goals.