Can You Assume an FHA Loan as an Investment Property?

The Federal Housing Administration (FHA) provides mortgage insurance on loans made by approved lenders to borrowers who may not qualify for conventional loans. FHA loans require lower down payments and credit scores than conventional loans. However, FHA loans have strict occupancy requirements – the property must be used as the owner’s primary residence. So can you assume an FHA loan as an investment property? There are some limited exceptions that allow FHA loans to be used on rental properties.

FHA Loan Overview

• FHA loans are government-backed mortgages insured by the Federal Housing Administration. They help low-to-moderate income borrowers and first-time homebuyers purchase homes.

• FHA loans offer low down payments – as low as 3,5% – and allow lower credit scores starting at 500 They have more flexible underwriting standards than conventional loans

• To qualify for FHA financing, you must intend to use the property as your primary residence where you live at least 9 months out of the year. Investment properties do not qualify.

FHA Occupancy Rules

The FHA has strict requirements regarding occupancy and using the property as your primary residence:

• You must move into the home within 60 days of closing and live there for at least 1 year

• You cannot use FHA financing on a second home or vacation home. It must be your main residence.

• Investment properties are not eligible for FHA loans. You cannot rent out the entire home.

The FHA monitors borrowers to ensure they are using the property as their primary residence. If you fail to meet the occupancy requirements, you could face consequences including foreclosure.

Exceptions for FHA Investment Properties

While FHA loans are intended for primary residences, there are some limited exceptions that allow you to rent out part or all of a property financed with an FHA loan:

• Multi-Unit Properties: FHA loans can be used to purchase properties with 2-4 units. However, you must live in one of the units as your main residence for at least 1 year. You can rent out the other unit(s).

• Relocation for Work: If you move for a job and need to buy a new primary residence, you may rent out your previous primary residence after living there for 1 year.

• Rooms for Rent: You may rent out rooms in your primary residence that you live in at any time, even with an FHA loan.

• Refinance Investment Property: If you move out after 1 year, you can refinance into a new FHA loan through a streamline refinance. You can also refinance into a conventional loan.

So while FHA loans cannot directly finance investment properties, there are a couple loopholes that real estate investors may leverage. The most common is financing a multi-unit property where you occupy one unit.

Using FHA on a Multi-Unit Investment Property

One way real estate investors use FHA financing is to purchase a multi-unit property with 2-4 units. Here are some tips on how it works:

• You must live in one unit as your primary residence for at least 1 year after closing. This satisfies the FHA owner-occupancy requirements.

• During that year, you can rent out the other unit(s) and collect rental income. Some owners even generate enough rent to cover their entire housing payment.

• After 1 year, you have more flexibility. You may move out and rent your unit as well. Or you can refinance into a different loan.

• There is no limit on the number of units in the building, as long as the FHA borrower purchases no more than 4 units.

• Your mortgage payment is based on rental income from all units using 75% of the rent roll.

Purchasing a multi-unit property and living in one unit is one of the most common ways real estate investors use FHA financing to buy rental property. It provides flexibility after living there for 1 year as your primary home.

Alternatives to FHA Investment Property Loans

If you want to purchase an investment property that does not qualify for an FHA loan, consider these alternative financing options:

• Conventional Rental Loans – You can get a conventional investment property loan with 20-25% down and higher credit scores.

• Portfolio Loans – Local banks may offer portfolio rental loans with lower requirements than conventional loans.

• Hard Money Loans – These asset-based loans from private lenders are quick to close but have high rates and fees.

• Private Lenders – You may find private lenders specializing in investment properties willing to lend to you.

• Partners – Joining forces with a partner can help you come up with a larger down payment to qualify for financing.

While FHA loans provide an affordable financing option for owner-occupied homes, investment buyers need to look to conventional or alternative loans instead. The exceptions allowing FHA loans on some rental properties provide creative real estate investors with opportunities.

• Purchase a multi-unit property (2-4 units) and live in one unit for 1 year
• Rent out your previous primary residence if you relocate for work
• Rent out rooms in an owner-occupied single family home
• Refinance into a non-FHA loan after living there 1 year

Outside of these exceptions, FHA loans cannot directly finance investment properties. Real estate investors must look to conventional mortgages and alternative financing options instead. But the multi-unit exception provides a way for investors to buy rental property with an FHA loan in the right circumstances.