Can You Rent a House With an FHA Loan?

The FHA loan program is popular among first-time homebuyers due to its low down payment requirements and flexible credit standards. A common question that arises is whether you can use an FHA loan to purchase a home that you intend to rent out rather than live in yourself. The short answer is yes, but there are some important requirements and limitations to be aware of.

FHA Occupancy Requirements

The primary restriction with FHA loans is that there are occupancy requirements for the borrower. If you purchase a home with an FHA loan, you as the borrower must intend to move into the home within 60 days of closing and occupy the home as your primary residence for at least 1 year

This means you cannot immediately turn the home into a rental property if you use FHA financing. You must live in the home for a minimum of 12 months before renting it out.

However, there are some exceptions that allow you to still rent the property out in certain circumstances:

• After 1 year of occupancy – After living in the home for 12 months, you are allowed to move out and rent the property to tenants. There are no restrictions on when you can start renting it after meeting the 1 year owner-occupancy requirement.

• Multifamily properties – If you purchase a 2-4 unit multifamily home, you can rent out the other unit(s) as long as you live in one unit yourself as your primary residence.

• Relocation – If you need to suddenly relocate for a job, military assignment etc., you may be able to rent out the property early with prior approval from the lender. Situations like this are evaluated on a case-by-case basis.

• Disabled family members – If you purchase the home for a disabled family member to occupy, you may be able to move in a caretaker instead after closing. Approval is required from the lender first.

As long as you follow FHA guidelines, you can rent the property out after living there for 1 year as the owner-occupant.

Using Rental Income to Qualify

When applying for the FHA loan, the lender will want to see that you can afford the monthly mortgage payment on your own without relying on expected rental income. You cannot use potential rental income to qualify for an FHA loan.

However, if you already own other investment properties, that existing rental income can be used to qualify. For example, if you own 2 rental condos currently generating monthly rents, that income can be counted by the lender.

The key is that verifiable, stable rental income from current properties may be used, but not speculative income on the new property you want to purchase and rent out later.

Financing Options for Investors

If you do not want to live in the home yourself and are looking to purchase a straight investment property, an FHA loan is not the right option due to the occupancy rules. Here are some alternative financing routes for real estate investors:

• Conventional loans – Traditional mortgages backed by Fannie Mae or Freddie Mac do not have residency requirements. You can purchase and immediately rent out the property. However, you’ll need a larger down payment of around 20%.

• Portfolio loans – Local community banks and credit unions often offer portfolio loans tailored to investors that may require only 10-15% down.

• Hard money loans – These short-term loans are higher risk and higher cost, but can fund fix-and-flip investors unable to get other financing.

• Private/alternative loans – Online lenders are expanding access to investor loans with more flexible qualifying terms than traditional loans.

• All cash purchase – Real estate investors sometimes opt to purchase properties outright without any financing to avoid restrictions.

Pros and Cons of House Hacking with FHA

House hacking with an FHA loan can be a smart move for first-time homebuyers who meet eligibility requirements. House hacking involves buying a small multifamily property with an FHA loan and living in one unit while renting the other(s).

Here are some of the key pros and cons of this strategy:

Pros

• Low 3.5% down payment on a multifamily property

• Income from rented units can cover part or all of your mortgage

• Gain rental income and management experience as a new investor

• Build home equity and savings through principal paydown

• Deduct expenses like mortgage interest, repairs, etc. on taxes

Cons

• Must live on-site for at least 12 months

• Income restrictions on which units you can personally occupy

• Out-of-pocket costs for maintenance and repairs

• Rental income volatility from vacancies, non-payment etc.

• Limitation to small 2-4 unit properties only

Tips for Managing FHA Investment Properties

If you plan to rent out a property purchased with FHA financing after meeting occupancy requirements, keep these tips in mind:

• Screen prospective tenants thoroughly – require credit checks and employment verification

• Collect security deposit equal to at least one month’s rent to cover any damages

• Purchase landlord insurance to protect against liability risks

• Inspect property regularly and fix issues quickly to keep tenants happy

• Build emergency fund for major repairs like roof replacement or HVAC system

• Hire a property manager if taking care of repairs/maintenance yourself is too burdensome

• Keep detailed records of income and expenses for tax purposes

• Refinance into a conventional loan after a few years to remove FHA restrictions

While FHA loans require you to live in the home at first, they can ultimately be a stepping stone to real estate investment if handled properly.

The Bottom Line

Yes, you can rent out a property purchased with an FHA loan, but not right away. You must personally occupy the home as your primary residence for at least 12 months after closing first. This makes FHA loans ideal for potential owner-occupants, but not investors only looking for rental properties. If you follow the rules, an FHA loan can be a smart way for new investors to “house hack” and start building their portfolio.