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 excellent way to build long-term wealth. However, financing investment properties can be more challenging than getting a mortgage for a primary residence. This leads many real estate investors to wonder – can you get an FHA loan for an investment property?
The short answer is no, you cannot get an FHA loan solely for an investment property in most cases. FHA loans are insured by the Federal Housing Administration (FHA) and come with certain eligibility requirements. The main one is that the buyer must live in the home as their primary residence
However, there are some exceptions that may allow an investor to use an FHA loan on a property that will generate rental income. In this article, we will explore:
- What FHA loans are
- FHA occupancy requirements
- Exceptions that allow rental income
- Tips for financing investment properties
Let’s dive in!
What Are FHA Loans?
FHA loans are government-backed mortgages that are popular with first-time homebuyers and borrowers with lower credit scores or less cash for a down payment. Some key features include:
- Down payments as low as 3.5%
- Lenient credit score requirements – typically 580
- Low mortgage insurance premiums
- Ability to finance closing costs into loan
FHA loans are insured by the Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development (HUD). If the borrower defaults, the FHA pays the lender to cover losses.
Over 716,000 Americans became first-time homeowners in 2021 using FHA loans. Their easy qualifications make them appealing. However, they come with strings attached.
FHA Occupancy Requirements
The main catch of FHA loans is that they must be used to purchase a primary residence, The borrower has to occupy the home within 60 days of closing and live there for at least 1 year,
This means FHA loans cannot be used to buy:
- Second homes
- Vacation homes
- Rental properties
- Investment properties
The reasoning is that FHA wants to promote affordable homeownership, not real estate investing. The occupancy rules help ensure the programs benefit owner-occupants.
Exceptions That Allow Rental Income
While rare, there are exceptions that may allow an FHA loan to be used on a property that also generates rental income:
Multi-Unit Properties – FHA allows loans on 2-4 unit properties, provided the borrower lives in one unit. For instance, you could buy a duplex or fourplex with an FHA loan, live in one unit, and rent the other(s) out.
Roommates – You can rent out rooms in an FHA-financed property at any time, provided you live there too. This includes taking on boarders.
Refinancing – Once you have lived in the property for at least 1 year, FHA allows you to refinance into a new FHA loan and turn it into a rental. You can also refinance into a conventional loan.
Relocation – If you move for work and need to buy a new primary residence, FHA may allow you to rent out the first home after occupying it for 1 year.
As you can see, the opportunities to use FHA financing on a rental property are limited. Even when allowed, you still have to live there initially for at least 1 year.
Tips for Financing Investment Properties
If you want to purchase a straight investment property that will be rented out entirely, an FHA loan likely will not work. Here are some better options:
Conventional Loans – You can get a conventional mortgage for an investment property with a bigger down payment, typically 25%. Rates may be higher than owner-occupied loans.
Portfolio Loans – Smaller banks may offer portfolio loans tailored to investors with proper financing experience.
Hard Money Loans – These asset-based loans from private lenders are ideal for fix-and-flip properties. Rates are higher but easier to qualify.
Partners – Team up with other investors and pool your money. Partners can help you buy larger properties.
All Cash – Ideally, paying all cash provides the most freedom and negotiating leverage. Save up to build capital over time.
The bottom line is that financing investment properties takes more money upfront and generally has stricter requirements. While FHA loans are an affordable option for primary residences, they are not suited for buying straight rental properties in most cases. Carefully weigh your options if you hope to use real estate investing to build wealth.
Frequency of Entities
investopedia.com:
FHA Loans – 12
investment property – 10
FHA loan – 10
real estate – 4
primary residence – 4
rocketmortgage.com:
FHA loan – 11
investment property – 8
primary residence – 5
real estate – 2
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.
How To Buy An Investment Property with an FHA Loan
FAQ
Can you assume an FHA loan as an investment property?
What is the FHA investor rule?
Can you use rental income for an FHA loan?
Does FHA allow investment purchases?
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