Using an FHA Loan for Investment Property: A Detailed Guide

Federal Housing Administration (FHA) mortgage loans, which are government backed, have more lenient qualification requirements than conventional loans. However, they’re not used to fund the purchase of an investment property, with an exception. If you’re willing to commit to treating one unit of a multi-unit investment property as your primary residence for at least a year, an FHA loan may be a great option for you.

In short, you can use an FHA loan for an investment property if you’re willing to live there.

For example, a real estate investor could purchase a fourplex, live in one unit, lease the other units out and get a return on investment from the rental payments they collect. You’ll also need to meet some other criteria, which we’ll discuss later.

Buying an investment property can be an exciting yet daunting process especially when it comes to financing. While conventional loans are commonly used FHA loans present an intriguing option worth exploring for investment purposes.

As a real estate investor and property manager, I’ve helped numerous clients navigate the complexities of FHA loans for their rental properties. Through first-hand experience, I’ve discovered the ins and outs of utilizing FHA financing creatively within regulatory bounds.

In this comprehensive guide, we’ll break down everything you need to know about using FHA loans to purchase investment properties.

Overview of FHA Loans

First, let’s start with a quick primer on FHA loans. FHA stands for Federal Housing Administration – they are government-insured loans aimed at assisting low-to-moderate income homebuyers.

Some key features that set FHA loans apart:

  • Lower down payments, often as low as 3.5%
  • More flexible credit score requirements
  • Access to grants and down payment assistance programs

While primarily designed for primary residences, FHA loans offer some wiggle room for investment property financing. Let’s explore how.

FHA Occupancy Requirements

Here’s the catch when it comes to FHA loans – they require owner-occupancy of the property for at least 1 year. You must move in within 60 days of closing and use the home as your primary residence.

The FHA views their loans as a avenue toward homeownership, not investment. So they impose strict occupancy rules, with few exceptions

Violating the 1 year owner-occupancy mandate can lead to consequences from additional fees to foreclosure. Definitely tread carefully here.

Exceptions for Using FHA Loans on Investment Properties

Despite the occupancy stipulations, investors have discovered certain loopholes in FHA guidelines that open doors to financing investment properties in strategic ways.

Here are some scenarios where FHA loans can work for purchases of investment real estate:

1. Live in One Unit of a Multi-Family Property

The FHA allows loans on 2-4 unit multi-family properties, as long as you live in one unit as an owner-occupant. This means you can generate rental income from the other units you don’t occupy.

Many investors utilize this strategy to offset their living costs while profiting off the investment. Just ensure you meet all FHA requisites, like moving in within 60 days.

2. Rent Out Former Primary Residence After Relocating

Say you had to relocate for a job and bought another primary home using an FHA loan. In this case, you may be able to rent out the initial FHA-financed property after living there for 1 year minimum.

This exception allows flexibility if your circumstances change while retaining compliance with FHA guidelines.

3. Rent Out Rooms in Primary Residence

As an owner-occupant, the FHA permits renting out rooms in your primary home without violating any policies. This includes options like taking on boarders or listing on services like Airbnb.

For many, this supplemental rental income can offset housing costs and build equity. Just be sure to comply with local regulations on short-term rentals.

4. Refinance into Conventional Loan

Once you have sufficient equity after the mandatory occupancy period, you may qualify to refinance into a conventional loan based on the property value.

This would remove FHA restrictions, opening the door to rent out the entire home as a pure investment property.

Just be aware that refinancing often comes with costs like appraisal fees, so run the numbers carefully beforehand.

5. Explore 203(k) FHA Loans

FHA 203(k) loans allow you to finance repairs or renovations together with the purchase price into a single mortgage. This presents an avenue to buy distressed fixer-uppers at a discount and add value.

As usual, you’d need to live in the property initially to satisfy FHA before renting out. But the 203(k) option broadens acquisition possibilities.

Key Takeaways

While FHA loans aren’t directly intended for investors, certain strategic applications can provide financing access for those unable to qualify for conventional investment loans.

The key is understanding occupancy requirements and exceptions within FHA guidelines. When used judiciously and ethically, FHA loans can serve as a launchpad into rental property investment.

Just ensure you work with an experienced lender familiar with nuances of using FHA financing for investment purposes. Patience and diligence is vital – no cutting corners to circumvent policies.

Owning rental property can be immensely rewarding. With proper planning and expertise, FHA loans can help turn your real estate investment aspirations into reality.

Purchase A Fixer-Upper With An FHA 203(k) Loan

FHA loans have minimum property requirements, but FHA 203(k) loans allow FHA home buyers to buy homes that fail to meet the FHA’s minimum property standards. With an FHA 203(k) loan, you can bundle the cost of repairing the home into the mortgage.

Again, you’ll have to live in at least one unit of the home. But just like standard FHA loans, FHA 203(k) loans are for properties with up to four units.

Refinance Your FHA Loan

If you bought a home with an FHA loan and meet the minimum occupancy requirement, you may be able to refinance your FHA loan to a conventional mortgage. If your credit score is higher and your income has increased since your original purchase, you may qualify for a conventional loan or another type of home loan – with fewer rules for investment properties.

This may allow you to turn a primary residence into an investment property and also improve your loan terms. For instance, you may end up with a lower interest rate and monthly mortgage payment. If you have more than 20% equity in your home, you’ll be able to remove private mortgage insurance (PMI) upon refinancing to a conventional mortgage.

Consider An FHA Streamline Refinance

Once you’ve lived in your FHA-financed house for at least 210 days after closing, an FHA Streamline Refinance might be an option – and allow for a better interest rate and lower monthly payments. But you’ll still have an FHA loan and need to meet all requirements mentioned above for an FHA loan investment property.

WATCH THIS Before Buying Your First Multifamily Rental Property with an FHA Loan!

FAQ

Can you assume an FHA loan as an investment property?

In short, you can use an FHA loan for an investment property if you’re willing to live there. For example, a real estate investor could purchase a fourplex, live in one unit, lease the other units out and get a return on investment from the rental payments they collect.

Can you convert an FHA loan to an investment property?

It cannot be used to finance a second home, a rental home, a vacation home, or an investment property. That said, there are some exceptions. You can use an FHA loan to purchase up to a four-unit dwelling, as long as you live in one unit as your primary residence. Then you can rent out the other units for income.

Can I rent out my FHA home after 1 year?

You will be required to move into the property within 60 days of closing and reside in it for at least one year. There are stiff penalties if you choose to ignore these requirements. However, there are still ways to rent out the property: After living in the home for one year, FHA allows you to rent out the property.

What is the downside of an FHA loan?

FHA loans require borrowers to pay mortgage insurance premiums (MIPs) at closing and throughout the life of the loan. Specifically, you’ll pay 1.75% of the loan amount at closing as your upfront MIP. Then, you’ll pay MIPs of 0.15% to 0.75% of the loan amount every year.

Can I use an FHA loan for a multi-unit investment property?

If you’re willing to commit to treating one unit of a multi-unit investment property as your primary residence for at least a year, an FHA loan may be a great option for you. In short, you can use an FHA loan for an investment property if you’re willing to live there.

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.

Why are FHA loans not used for investment properties?

This rule is one of the main reasons that FHA loans aren’t typically used for traditional investment properties. Instead, they’re used more frequently for house hacking strategies where you live in one part of the property and rent out the rest. How do FHA loans affect the closing process when purchasing an investment property?

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.

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