Can FHA Loans Be Used For Investment Properties?
Scott Steinberg4-minute read
November 28, 2022
Using an FHA loan for investment property may seem like a tempting proposition, but unfortunately, in practice, it’s an uncommon approach to real estate funding that’s not easy to make happen. In effect, while FHA loans can be used to finance the purchase of a primary residence, outside of a small handful of exceptions to the general rule, these types of home mortgages cannot be used to fund investment properties. Curious to learn more? Let’s take a closer look at how the FHA’s occupancy requirements work, and how you can utilize FHA loans.
What Is An FHA Loan?
FHA loans are types of home mortgages that are backed by the Federal Housing Administration. Crafted as means to help low- and moderate-income buyers more readily achieve the dream of homeownership with less up-front savings and spending, FHA loans rank among the range of government loans that are considered to be non-conforming mortgages. In essence, while they often prove a helpful tool for many prospective homeowners, these home mortgage products don’t meet government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac’s standards for purchase. But because FHA loans come with minimal down payment requirements and low minimum credit score eligibility terms though, they’re often a popular choice with first-time home buyers.
FHA Property Requirements
By comparison, FHA loans typically come with fewer requirements attached than other types of federal government-backed loan products such as USDA (U.S. Department of Agriculture) or VA (Department of Veterans Affairs) loans. However, FHA loans − which are provided by FHA-approved lenders, not the agency itself − are used to finance the purchase of primary residences. Borrowers who seek to purchase properties with an FHA loan must take possession of the property within 60 days of closing on their mortgage and must use the property as their principal residence for 1 year minimum.
At the same time though, the FHA has exceptions for some commercial properties as well as purchase of a multiunit dwelling (of up to four units), on the condition that you live in one of the units. (Noting that the others can then be rented out.) Alternately, if you’re required to relocate by your job and need a second home, you can rent out your first home after you’ve lived it in for a year, as required by FHA guidelines. In addition, if you’re unable to work due to incapacitation, you may be eligible to rent out rooms in your house to boarders as an alternate source of income under FHA special provisions.
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FHA Occupancy Requirements
The FHA requires that you live in a property that you purchase as your primary residence, that your property must meet certain livability standards, and that you’ll have to move in within 60 days of closing. Likewise, to receive an FHA loan, you’ll have to occupy the property for at least one year to satisfy eligibility requirements.
Can FHA Loans Finance Investment Properties?
Technically, no − FHA loans cannot be used to fund investment properties, outside of the exceptions detailed further below.
What Is An Investment Property?
An investment property is purchased for investment purposes in hopes that the property will gain in value as time passes and/or generate ongoing rental income. If you do not occupy the property as a primary residence, it will generally qualify as an investment property or second home. Different types of mortgages can be utilized to finance investment properties, with conventional mortgages and jumbo loans among the most popular offerings. Given their constraints, FHA loans are not typically used as a vehicle for funding real estate investments.
Exceptions For FHA Loans And Investment Properties
As noted though, there are exceptions to the rule in which FHA loans for investment property may be applied.
Purchase A Multiunit Property
Some home buyers choose to purchase a multiunit or multifamily property of up to four units using an FHA loan for investment property. Under this setup, a multiunit home can be both owner-occupied (with the owner living in one unit) and other units rented out to tenants in order 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 tidy additional 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 to start). Likewise, if you’re sidelined due to illness or injury, you may be able to rent out a spare room or two in your house to tenants as an alternative to full-time employment. Mind you: You might also pay off your mortgage early (since the FHA does not apply prepayment penalties) and then resell the property as well if so desired.
Refinance An FHA Loan
Once 210 days have passed after closing on your original home loan and a minimum of six monthly payments have been made on your FHA mortgage, other options also become available. For example: Having met these terms, you could additionally do an FHA-to-FHA refinance into an FHA Streamline Refinance (aka refinance into another loan, and potentially lower your interest rate and monthly payments by doing so.)
Keep in mind, if your FHA loan is less than 1 year old, you also cannot 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 purchase and finance primary residences. That said, you’ll find some small exceptions to the rule that may provide armchair real estate investors with opportunities to leverage FHA loans to acquire investment properties. Interested in investing in real estate? Before diving in and applying for an FHA loan, be sure to read up further on buying rental properties, as other types of mortgages may be better suited to the task at hand.
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