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Do FHA loans allow for the purchase of investment properties?

Quick Summary

  • Investment properties, commercial estates, rental homes, and vacation homes are not eligible for FHA financing.
  • With an FHA loan, you can rent out a multi-unit house as long as you live in one of the units.
  • You can turn your FHA home into an investment property after a year of living there.
  • If you meet certain exceptions and have completed the one-year occupancy rule, you can have a second FHA loan while renting out your first home.

Because of the low downpayment and credit score requirements, the Federal Housing Administration (FHA) loan is an excellent choice for first-time homebuyers. This is especially beneficial for those who have difficulty qualifying for conventional mortgages.

But, can you use the FHA to purchase an investment property? The FHA loan was created to assist homebuyers, not real estate moguls. The FHA expressly states that it does not lend on investment properties, rental homes, commercial estates, or vacation homes. In fact, it has policies in place to prevent this from happening. This loan, however, allows homeowners to generate rental income. This article will show you how to turn your FHA home into a cash-generating property.

What is an FHA loan?

For first-time home buyers, the FHA Loan is a popular mortgage option. The Federal Housing Administration insures it, and it is issued by approved lenders or banks. This loan is unique in that it necessitates lower minimum credit scores and downpayments, especially when compared to other types of conventional loans

During the Great Depression, Congress established it in 1934. At the time, 50% down payments were the norm, making it impossible for the average American to realize the ultimate American dream of owning a home. The government made an effort to make it easier for borrowers to qualify for home loans, and the FHA loan was created as a result.

Investment Property FHA Loan Requirements

Obtaining approval for an FHA loan requires numerous steps and guidelines. You can’t use an FHA loan to buy an investment property outright, but here are some rules to keep in mind:

  1. For a 3.5% down payment, you need a credit score of 580.
  2. If your credit score is between 500 and 579, you’ll need a 10% down payment.
  3. You’re going to have to pay the Mortgage Insurance Premium (MIP) for the whole time you have the loan. It costs 1.75 percent of your loan up front and 0.45 percent to 1 percent of your loan each year (depending on the length of your mortgage). The only time this isn’t true is if you pay at least a 10% down payment. If you do that, your MIP will go away after 11 years.
  4. Your Debt-to-Income (DTI) ratio can’t be higher than 43%. This means that your total monthly mortgage and debt payments can’t be more than 43% of your gross monthly income.
  5. You must fulfill the occupancy requirement. This means that you have to move into the house within 60 days of the deal closing and make it your main home for at least a year.
  6. The person who wants to borrow money must have proof of a steady job and income.

FHA loans are based on these requirements, but some people may have other things to think about, such as the additional requirements of getting a 203k FHA loan to fix something up. Also, different lenders might have different requirements. This time around, find an approved FHA lender Talk to them about your plans and where you are in life to clear up any questions or doubts.

How to Get an FHA Loan for a Rental Property

Investors in real estate know that buying properties as investments means meeting strict requirements and paying higher interest rates. This is why the FHA loan seems like a good idea. But again, the FHA was made to help people buy their first home, not to help investors build a real estate empire. Still, the FHA loan is a great way to own a property and make money from renting it out. It’s a good idea for people who want to try out being a landlord.

Can I use an FHA loan to buy a house to rent out?

Buy a house with more than one unit.

The FHA will back loans for both single-family homes and properties with more than one unit. You can get a duplex, a triplex, or even a fourplex, which is the most you can get. You can rent out the other units as long as you live in one of them. This makes you an on-site landlord. If you’re smart, you can live in a house for free because your tenants will pay your mortgage. In real estate terms, this is called “house hacking.”

After living in your multi-unit home for a year or more and saving money for your next real estate investment, you can move out, rent out your unit, and start the process over again. You can’t get another FHA loan, so you should try to improve your credit score. You can’t have more than one FHA loan at once. You can’t get another FHA loan for a second house unless you sell your first home.

Not all second FHA loans are the same.

You are allowed to have many FHA loans over the course of your life, but never all at once. Having said that, there are a few notable outliers.

If you have satisfied the requirement that you live in the home for at least a year before applying for a second FHA loan, you are eligible to rent out your first home in the event that you are forced to move for employment reasons or if your family expands to the point where your current home is no longer large enough to accommodate everyone. If you are unable to work due to illness, you may rent out your rooms to make up for the income you would have earned.

If you were a co-borrower on the first loan and you wish to move out on your own, this is another exception to the rule that prevents you from acquiring a second FHA loan. The situation that occurs most frequently is a divorce in which one of the couples desires to separate. Or perhaps you are a co-borrower who does not reside on the property but did so in an effort to assist a friend or family member in meeting the requirements necessary to qualify for the loan. In these circumstances, you have the ability to apply for a “second” FHA loan.

Alternately, you might just wait till the occupancy requirement for a year has run its course. Once you have fulfilled this criteria, you are free to do whatever you wish with the property, including renting it out to others if you so choose.

Obtaining a Refinance on Your FHA Loan

Refinancing your FHA loan entails transferring an existing loan into a new loan with lower interest rates. This means greater savings over time. If you own an FHA home and rent it out, refinancing can result in additional monthly savings.

There are two primary types: FHA-to-FHA and conventional. The preceding is also known as FHA streamline financing, and it is a very simple process if you already have an FHA loan.

Included among the requirements are:

  • Minimum of 210 days have passed since you closed on
  • Minimum of six timely monthly payments
  • In the past six months, all mortgage payments were made in the month they were due.
  • One 30-day late payment or less in the preceding six months
  • A net tangible benefit

If your credit score has improved and you’ve built up 25% equity in your home, a conventional refinance may be a good option for you. With conventional loans, you will be eligible for lower insurance rates. This will allow you to reduce your monthly obligations. However, the process is somewhat more complicated because conventional loans have stricter qualifications.

How to Obtain an FHA Investment Property Loan

Contact Your Lender

It is always advisable to communicate with your lender at every stage. This is particularly useful at the start. You will be able to organize your documents and know how much you can loan, enabling you to gain a clear understanding of your budget range. Most importantly, you will be able to comprehend your renting options if any of the above uncontrollable situations apply to you.

Do Not Commit Fraudulent Occupancy

It must be emphasized: do not commit occupancy fraud. If you apply for an FHA loan with the intention of using the property as a rental, you will incur significant penalties. The maximum penalty is thirty years in prison and one million dollars in fines. Before attempting to turn your FHA-insured home into an investment opportunity, you should be familiar with FHA rules.

The Conclusion

The FHA loan does not insure investment properties, commercial properties, second homes, vacation homes, or rental homes. It only applies to primary residences.

Of course, there are exceptions to this rule. If you purchase a multi-unit dwelling, you may rent out the other units so long as you occupy one of them. You can also obtain a second FHA loan if circumstances beyond your control, such as a job transfer, force you to relocate. If your family has grown to the point where your current home cannot accommodate everyone, you may qualify for another FHA loan if you have equity in your current home and still meet the DTI requirements. If the occupancy rule is met, you can rent out your first home in either scenario. If you are incapacitated and unemployed, you can rent out your rooms to generate additional income. In addition, you can refinance your loan using either an FHA streamline or a conventional refinance.