Can FHA loans be used for investment properties?

Using a Federal Housing Administration (FHA) loan for an investment property may seem tempting, but unfortunately, it’s an approach to real estate funding that’s not straightforward. These types of mortgages can’t be used to fund investment properties directly because FHA loans must be used to buy a primary residence, outside a small handful of exceptions.

Let’s take a closer look at how the FHA’s occupancy requirements work, and how you can use FHA loans for your next real estate purchase.

What is an FHA loan?

FHA loans are government-backed loans issued by the Federal Housing Administration. These types of loans are non-conforming mortgages aimed at helping low- and moderate-income buyers achieve the dream of homeownership with less up-front savings and costs.

For eligible borrowers, FHA loans come with lower down payment requirements and lower minimum credit scores. They’re often a popular choice with first-time home buyers for these reasons.

FHA occupancy requirements

The Federal Housing Administration requires you to use the home as your primary residence for one year, meet the livability standards and 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). A condition is that you live in one of the units. The other units can then be rented out.

Alternatively, 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, as required by FHA guidelines.

You can rent out rooms within the home you live in at any time, even if you have an FHA loan. In addition, if you’re unable to work because you are sidelined for health or other reasons, you may be eligible to rent out rooms in your house as an alternate source of income. Check your loan application under FHA special provisions to see if this applies.

Can FHA loans finance investment properties?

Technically, no. FHA loans can’t be used to fund investment properties, outside of the exceptions detailed below.

What is an investment property?

An investment property is bought with the hope that the property will gain in value as time passes and/or will generate ongoing rental income. 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 constraints, FHA loans are not typically used to fund real estate investments.

Exceptions for FHA loans for investment properties

As noted though, there are 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. Under this setup, a multiunit home can be both owner-occupied (with the owner living in one unit) while renting out other units to generate rental income. Owners who purchase properties in this fashion may be able to receive enough rental income to live on-site free and even turn a profit.

Rent out your primary residence

Again, if you’re forced to relocate for work and require a second home, you may also be eligible to rent out your first home (after living in it for one year). You can also rent out rooms within your home (assuming you’re living in it yourself as a primary residence) at any time without violating FHA rules.

Refinance an FHA loan

To refinance your FHA loan, 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. Once you meet these terms, you could apply for an FHA refinance like an FHA Streamline Refinance (aka refinance into another loan and potentially lower your interest rate and monthly payments by doing so.) Another option is to refinance into a conventional loan. 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 loan.

Keep in mind, if your FHA loan is less than one year old, you also can’t have had any payments go overdue for more than 90 days. If it's more than a year old, you’re given an allowance of one late payment in the last 12 months − but not if this late payment has occurred within the last 90 days. On the bright side, FHA streamline refinances (as the name indicates) are often quick to approve and close, and may only require minimal to no employment, income, or credit score verifications or a home appraisal depending on your situation.

The bottom line

FHA loans are not intended for investment property − rather, they’re generally used to finance a primary residence. That said, you’ll find some small exceptions to the rule that may provide real estate investors with opportunities to leverage FHA loans to acquire investment properties.

Move forward with your investing dreams and apply for a mortgage approval with Rocket Mortgage^? today.