Can You Use an FHA Loan to Buy a Rental Property? Everything You Need to Know

If you’re interested in becoming a landlord, you may be wondering if you can use an FHA loan to purchase an investment property FHA loans are popular options for first-time homebuyers because of their low down payments and flexible credit requirements. But can these government-backed mortgages also help you buy your first rental property?

As an real estate investor myself I’ve done extensive research into FHA loan guidelines for rental properties. In this comprehensive guide I’ll explain FHA occupancy requirements, outline what types of investment properties qualify, and share tips for getting approved.

FHA Owner-Occupancy Rules for Rental Properties

The most important thing to understand about FHA loans and rental properties is that the FHA requires owner-occupancy. For a property with 2-4 units, you must plan to live in one of the units as your primary residence.

The FHA views their mortgages as helping borrowers become homeowners, not landlords. So you cannot use an FHA loan to purchase a rental property that you will not personally occupy.

This occupancy requirement is stated directly in HUD Handbook 4000.1:

“Properties with one to four units where the borrower occupies one unit as a principal residence and rents the remaining units are eligible for FHA-insured financing.”

If you want to house hack by living in one unit and renting the others, FHA loans allow this. But you cannot purchase a purely investment property that you won’t live in yourself with an FHA mortgage.

What Types of Rental Properties Can You Buy?

Given the owner-occupancy requirements, here are the specific types of rental properties eligible for FHA loans:

• Single-family home – If you buy a SFH with an FHA loan, you can rent out rooms or a basement apartment. But you must live in the home as your primary residence.

• Duplex – FHA allows you to buy one unit of a duplex to live in, while renting out the other unit. Both units can be financed together in one FHA loan.

• Triplex or Fourplex – Similar to a duplex, you can finance a triplex or fourplex in one FHA loan while occupying one unit and renting the rest.

• Mixed-Use Property – An FHA loan can finance a property where part is commercial space and part is residential. You must live in the residential section.

The common theme is that the borrower must move into one of the units. You cannot purchase a 5+ unit apartment building or detached rental properties that you won’t occupy.

Tips for Getting Approved for an FHA Rental Property Loan

If you want to house hack using an FHA loan, follow these tips to improve your chances of getting approved:

• Meet minimum FHA occupancy times – You must plan to live in the property for at least 12 months. FHA also specifies you should not move out within 6-12 months of closing.

• Review rent vs. mortgage – Show lenders that projected rental income exceeds the mortgage payment so the property cash flows.

• Check zoning laws – Ensure the property is zoned for rentals and won’t violate any local ordinances.

• Inspect thoroughly – Carefully evaluate property condition to avoid expensive repairs.

• Consider using a real estate agent – An experienced agent can help you find a viable rental property and navigate the financing process.

Meeting FHA underwriting guidelines for sufficient income, credit, and down payment will also boost your approval odds. An FHA-approved lender can advise you on the full documentation required.

Pros and Cons of Using FHA Loans for Rental Properties

Let’s examine some of the key advantages and potential drawbacks of financing investment properties with an FHA loan:

Pros

• Low 3.5% down payment requirement
• Easier to qualify than conventional loans
• Lower credit score requirements
• Lower mortgage insurance (MIP) than conventional loans

Cons

• Must be owner-occupied for at least 12 months
• Limited to 1-4 unit properties
• Cannot purchase detached rental properties
• Refinancing into a conventional loan can be difficult

For the right borrower and property, FHA loans can offer more affordable and accessible financing. But the occupancy rules limit this to your primary residence only.

Alternatives to FHA Loans for Rental Properties

If you don’t want to live on-site, here are some other options for financing investment properties:

• Conventional loans – Require larger down payments but allow non-owner-occupied rentals.

• Portfolio loans – Offered by community banks and credit unions without conforming to Freddie/Fannie guidelines.

• Hard money loans – Asset-based financing from private lenders at higher rates.

• Business loans – SBA 7(a) and 504 loans can be used for real estate investment purposes.

• Private money – Seek financing from private real estate investors willing to fund rental properties.

Each option has its own pros and cons. Consulting an investment property mortgage broker can help you identify the optimal loan type for your situation.

Final Thoughts on FHA Loans and Rental Properties

FHA financing can be a great way for first-time homebuyers to purchase a property with multiple units, live in one unit, and rent the rest. Just make sure you fully understand FHA occupancy requirements and plan to move into your new home.