Can FHA loans be used for investment properties?

A Federal Housing Administration (FHA) loan is designed for an owner-occupied property. This means using an FHA mortgage to buy an investment property generally isn’t an option. But there are a handful of exceptions that allow you to use FHA financing to meet your investment goals. Let’s take a closer look at how the FHA’s occupancy requirements work and how you can use an FHA loan for your next real estate purchase.

What is an FHA loan?

FHA loans are government-backed loans issued by private lenders and guaranteed by the Federal Housing Administration. These types of loans are non-conforming mortgages aimed at helping buyers with less than perfect credit and modest down payments become homeowners. Rocket Mortgage offers FHA loans for a down payment as low as 3.5% and a credit score as low as 580¹.

For borrowers with lower credit scores, FHA loans can also be cheaper than conventional loans. Keep in mind that mortgage insurance is required with an FHA loan.

FHA occupancy requirements

To use an FHA loan to buy a home, you’ll have to meet the following Federal Housing Administration requirements:

• You must use the home as your primary residence for at least one year
• You must meet FHA livability standards
• You must move in within 60 days of closing.

FHA loans have exceptions for some commercial properties and for the purchase of a multiunit dwelling of up to four units. For instance, if you live in one of the units, you may treat the other units as investments and rent them out.

If you’re required to relocate because of your job and need a second home, you can rent out your first home after you’ve lived in it for a year. You can also rent out rooms within the home you live in at any time, even if you have an FHA loan.

If you’re looking to use the loan as a means to owning an Airbnb property, you should know that FHA rules prohibit you from using the property for “transient” rentals that are 30 days or less. So, investors will need to look at other ways to finance an Airbnb rental.

Can FHA loans finance investment properties?

Technically, no. You can’t use an FHA loan for investment properties because you have to occupy at least one unit as your primary residence. An investment property is bought with the intention of generating wealth from rental income and property appreciation. If you don’t occupy the property as a primary residence, it will generally qualify as an investment property or second home. Different types of mortgages can be used to finance investment properties, with conventional home loans and jumbo loans among the most popular offerings. Given their occupancy requirements, FHA loans are not typically used to fund real estate investments.

Exceptions for FHA loans for investment properties

There are some exceptions to the FHA investment property guidelines.

Purchase a multiunit property

Some investors will use an FHA loan to buy a multiunit or multifamily property of up to four units. If the home remains owner-occupied – where the owner lives in one unit, they can rent out other units to generate rental income. Owners who purchase properties this way may be able to receive enough rental income to live on-site free and even turn a profit.

Rent out individual rooms

If you’re forced to relocate for work and require a second home, you may also be eligible to rent out your first home if you’ve lived in it for at least one year. If the home is your primary residence, you can also rent out rooms within your home at any time without violating FHA rules.

Refinance an FHA loan

Many homeowners might wonder if you can refinance² FHA loan rental property restrictions away. The answer is yes, and it is a popular strategy for budding investors. To turn your primary home into a full-time rental, you’ll have to meet a few qualifications first.

You must live in the home for a minimum of 210 days after closing and make a minimum of six monthly payments on your FHA mortgage before you are eligible to apply for the FHA Streamline Refinance³ program. You can check to FHA refinance rates to see if this move would make sense for you. The Rocket Mortgage refinance calculator can also help you understand if refinancing would help you save money. You could also opt to refinance into a conventional loan.

Because conventional loans are not subject to the FHA's strict owner-occupancy requirements, refinancing lifts those restrictions and allows you to move out and use the home as an investment property. However, you'll want to check your loan-to-value ratio to avoid having to pay private mortgage insurance (PMI) if you owe more than 80% on your new loan.

The bottom line: FHA loans aren’t the best option for investment properties

FHA loans are designed to help people become first-time homeowners, so they aren’t ideal if you want to buy a standalone rental property. The strict occupancy rules require you to live in the property for at least one year, meaning you cannot buy a home purely to rent it out.

However, if you are willing to get creative, there are exceptions that can get you started. You can legally use an FHA loan to purchase an owner-occupied multi-unit property, rent out spare rooms, or eventually refinance into a conventional mortgage to drop the strict residency rules altogether.

If you are ready to explore your financing options and find the perfect loan for your real estate goals, you can start your mortgage application with Rocket Mortgage today.

¹ To qualify for this offer, you must meet all standard FHA eligibility requirements. In addition, your total mortgage payment, including taxes and insurance, cannot exceed 38% of your income, your debt-to-income (DTI) ratio cannot exceed 45%, and you must have 12 months of verifiable housing history immediately prior to your application, no late payments 30 days or greater in the last 12-months, and no derogatory marks on your credit report. Not available on jumbo loans. Asset statements may be need, no more than 1 day of non-sufficient fund fees are allowed in the most recent 2 months prior to application. Additional restrictions/conditions may apply.

² Refinancing may increase finance charges over the life of the loan.

³ The FHA Streamline program may have stricter requirements in some states. In order to qualify for the FHA Streamline program, an immediate .5% minimum reduction in interest and mortgage insurance premium is required. Some states may require an appraisal.