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.
Getting an FHA loan for an investment property may seem like a great idea at first glance. FHA loans require lower down payments and credit scores than conventional loans, making them more accessible for many borrowers. However, using an FHA loan for real estate investing is tricky due to strict FHA occupancy rules.
In this comprehensive guide, we’ll cover everything you need to know about utilizing FHA financing to purchase investment properties. Read on to learn about:
- What FHA loans are and how they work
- FHA occupancy and eligibility requirements
- When FHA loans can and can’t be used for investment properties
- Creative exceptions that allow FHA financing on investment properties
- Strategies for getting approved for an investment property FHA loan
What Are FHA Loans?
FHA loans are government-insured mortgages backed by the Federal Housing Administration (FHA), These loans help make homeownership possible for more Americans by requiring lower down payments and having more lenient credit standards than conventional mortgages,
Some key features of FHA loans include
- Down payments as low as 3.5%
- Minimum credit score requirements of 580
- Higher debt-to-income ratio allowances
- Low closing costs
Because of these borrower-friendly guidelines, FHA loans are extremely popular with first-time home buyers and low- to moderate-income buyers. But how do they work for real estate investors? Let’s examine the program rules.
FHA Occupancy and Eligibility Rules
The FHA has strict requirements when it comes to occupancy, intended to prevent predatory lending and ensure borrowers use FHA financing responsibly.
Here are the key FHA occupancy rules:
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Borrowers must occupy the property as their primary residence. FHA loans can’t be used to purchase pure investment properties or second homes.
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Borrowers must live in the home for at least 12 months. You must move into the property within 60 days of closing and occupy it as your primary home for at least 1 year.
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The home must be appraised and meet FHA minimum property standards. An FHA appraiser must certify that the home is habitable and structurally sound.
These safeguards promote homeownership sustainability for FHA borrowers. But they also limit options for real estate investors who don’t plan on living in their properties long-term.
When FHA Loans Can & Can’t Fund Investment Properties
Given the primary residency requirements, FHA mortgages generally can’t directly finance investment properties. However, there are some exceptions that provide creative workarounds for investors.
When FHA Loans DON’T Work for Investment Properties
You typically can’t use FHA financing in these investment property scenarios:
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Purchasing a rental property you won’t occupy – Simply using an FHA loan to buy a traditional rental property you won’t personally live in will violate FHA guidelines.
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Buying a flip house you don’t intend to live in – If you’re purchasing a fixer-upper rental solely to renovate and resell for profit, you can’t use FHA financing.
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Purchasing a second home or vacation property – FHA loans can only be used to buy your primary residence, not secondary homes or vacation properties.
When FHA Loans MAY Work for Investment Properties
In certain specific situations, you may be able to creatively use FHA financing to acquire investment properties:
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House hacking – FHA loans can be used to purchase a 2-4 unit property as long as you live in one of the units as your primary residence for at least 12 months.
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Delayed rental – If you live in the property for a year, FHA guidelines allow you to move out and rent the home after satisfying the minimum occupancy period.
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Renovation financing – FHA 203(k) loans allow you to finance purchase and renovations together, as long as you’ll occupy the property for at least 12 months after repairs are completed.
While doable, these options still require you to live on-site for some time. But with careful planning, they can provide a way to tap into FHA financing for investments.
5 Tips for Getting Approved for an FHA Investment Property Loan
If you want to utilize an FHA-insured mortgage to acquire an investment property through house hacking, delayed rental, or renovation financing, follow these tips:
1. Find a qualified multi-unit or fixer-upper property – Make sure the property meets FHA eligibility rules. For multi-unit financing, look for a duplex, triplex, or 4-plex. With renovation loans, identify a property requiring repairs and improvements.
2. Ensure the property meets FHA appraisal and lending standards – The home must be residential in nature, structurally sound, and meet FHA minimum property requirements after appraisal.
3. Plan to live on-site for at least 12 months – Occupancy rules are non-negotiable. Expect to personally occupy one unit for at least one year after closing.
4. Talk to lenders familiar with FHA investment lending – Not all lenders handle these exceptions well. Find one experienced in multi-unit or renovation financing scenarios.
5. Get prequalified based on your finances – To confirm you qualify, go through prequalification and get a preapproval letter before making an offer.
Follow these best practices, and your chances of acquiring an investment property with an FHA loan will drastically improve.
The Bottom Line
While FHA loans aren’t directly intended to purchase investment properties, exceptions do exist that provide savvy real estate investors with an avenue to tap into these affordable, government-backed mortgages.
If you’re willing to live on-site initially and comply with FHA borrowing rules, utilizing an FHA loan to acquire a multi-unit, rental, or fix-and-flip property is possible with the right plan.
Just make sure to connect with lenders experienced in unconventional FHA financing scenarios for investment properties. This will ensure your unique situation is properly understood and handled.
With strategic thinking and preparation, FHA financing can serve as a creative way to invest in real estate even with strict occupancy conditions. Approach the process carefully, follow the guidance above, and your investment dreams can become a reality even with an FHA loan!
FHA Occupancy Requirement
Under FHA rules and guidelines, the property being financed must be occupied by the owner. This means that rental and seasonal properties do not apply. The FHA uses this rule to prevent investors from benefiting from the program.
The borrower must take possession of the home within 60 days after the mortgage closes, and they must live in the home for the majority of the year. The property must be used as a principal residence for at least one year. If there is more than one borrower listed on the mortgage, the FHA requires that at least one of them must satisfy the occupancy requirement.
The FHA doesn’t actually lend money for mortgages. Instead, loans are made by FHA-approved lenders, such as banks or other financial institutions.
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?
Can an investor get a FHA loan?
Can you get an FHA loan for a second home or investment property?
Can you use rental income for an FHA loan?
Should I use an FHA loan for an investment property?
An FHA loan for an investment property offers a low down payment of 3.5%. However, using this option means paying an upfront mortgage insurance premium (MIP) plus monthly mortgage insurance over the life of the loan. This information pertains to investment properties and FHA loans.
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 you buy a rental property with an 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 a first-time home buyer use an FHA loan?
Many first-time home buyers use an FHA loan for the same reasons and assistance programs to lower closing costs and help with a down payment. FHA loans are also considered nonconforming mortgages because they don’t meet the standards of Fannie Mae or Freddie Mac for a property purchase. However, the question at hand is about using an FHA loan for an investment property, which is a different matter.