Can I Rent Out My House With An FHA Loan?

Getting an FHA loan can be a great option for many homebuyers, especially first-time buyers or those with less-than-perfect credit. The low down payment requirements and flexible credit standards make FHA loans accessible to more people. However, FHA loans come with certain occupancy requirements that prohibit renting out the property right away. So what are the exact rules around renting out a home purchased with FHA financing?

FHA Loan Occupancy Requirements

The primary occupancy requirement for FHA loans is that you must move into the home within 60 days of closing and live there for at least 12 months. This is to ensure that FHA-insured loans are going towards owner-occupied properties not investment properties.

During the first year of your FHA loan, you are not allowed to rent out your entire home. However, there are a couple potential exceptions:

• Renting out part of the property – If your home is a 2-4 unit multi-family dwelling, you can rent out the other units as long as you live in one unit full-time.

• Relocation for employment – In some cases, if you need to relocate for employment reasons, you may be able to rent out the home after living there for only a short period of time.

After you have lived in the home as your primary residence for at least 12 months, FHA allows you to rent out the entire property. So if you need to move somewhere else after the first year, renting out the FHA-financed home is permitted.

Converting an FHA Loan to a Rental Property

If you want to rent out your FHA home after meeting the 12 month occupancy requirement, you simply need to inform your lender and have the mortgage switched over to an investment property loan. This involves a full underwriting of the rental property to ensure it will cash flow adequately to support the mortgage payment.

As long as you can find qualified tenants and show sufficient rental income this is a straightforward process. The loan will be switched to a conventional investment loan and the FHA insurance removed.

One other option is keeping the FHA financing but having the loan “seasoned” as a rental. After you have rented the property for at least 12 months and made timely mortgage payments, it can become a seasoned FHA rental property. This avoids having to refinance but comes with stricter rental income requirements.

Buying a 2-4 Unit Multi-Family Home

Purchasing a small multi-family home is the easiest way to have a rental property with an FHA loan from the start. As mentioned, you can immediately rent out any units beyond the one you occupy. For example, if you purchase a 4-plex, you could live in one unit and rent out the other three.

The FHA occupancy requirements still apply, so you must intend to live in one of the units as your primary residence when purchasing the property. Multi-family homes of 2-4 units are eligible for FHA financing in most cases.

Renting Out a Primary Residence Due to Relocation

Occasionally, FHA does make exceptions to their occupancy rules if you need to relocate and move out of the home shortly after purchase. Reasons like a new job in a different area or care for a family member may allow you to rent out the property early.

However, you typically need to have occupied the home for some period of time first – usually at least 3-6 months. And you will need to provide proper documentation for the reason you need to move. This exception is evaluated on a case-by-case basis and not guaranteed to be approved.

Pros and Cons of Renting an FHA Property

Below are some key pros and cons to be aware of if you want to rent out a property purchased with FHA financing:

Pros

• Low down payment of just 3.5%
• Easier to qualify than conventional loans
• Multi-family properties eligible

Cons

• 1 year occupancy requirement
• Refinancing or seasoning loan required to rent later
• Ongoing mortgage insurance payments

While it takes some planning, renting out an FHA property can be done in many situations. The occupancy rules aim to protect against predatory lending, but FHA does allow responsible landlords to rent out properties over time. Talk to your lender early on about your plans if you may want to rent in the future.

Alternatives to Renting an FHA Property

If you don’t want to deal with the occupancy requirements of an FHA loan, here are a couple alternatives to consider:

• Conventional loan – Conventional mortgages have no occupancy restrictions, so you can immediately rent out the property after purchasing. Credit standards are higher though.

• Portfolio loan – Some banks offer portfolio loans with more flexible requirements if you don’t qualify for conventional financing.

• Cash purchase – Saving up to buy a rental property in cash avoids financing altogether. But this option takes more money upfront.

• Hard money loan – Hard money loans are short-term, high-interest products meant for investment properties. Requirements are light but rates are expensive.

The Bottom Line

Renting out a home purchased with FHA financing is possible but does require you to live there for at least 12 months initially. After that time period, you can convert it to a rental property through various options. Or you can look into alternative mortgages if you need a rental from the start. Consider both the pros and cons when deciding if an FHA loan is right for your rental property investment.