If you're diving into the world of real estate investing, you might be wondering if you can use an FHA loan for investment property. It’s a question many new investors ask, and the answer might surprise you!
While FHA loans are typically linked to first-time homebuyers, with their low down payments and flexible qualification criteria, they can sometimes be leveraged to generate rental income. In fact, under the right circumstances, an FHA loan could become a stepping stone for building your investment property portfolio.
FHA loans, or Federal Housing Administration loans, are government-backed mortgages aimed at helping individuals with lower credit scores or limited financial resources become homeowners. With a down payment as low as 3.5% and more lenient credit score requirements compared to conventional loans, they’re a go-to choice for many homebuyers. However, it’s essential to know that FHA loans come with specific rules about property eligibility.
These loans are generally intended for primary residences, which is limiting if you’re thinking purely in terms of investment properties. But here’s the twist: certain property types, like multifamily homes, can still allow you to collect rental income while complying with FHA guidelines. Curious how this works? Let’s explore.
FHA Loans Have Occupancy Requirements
One of the most important features of an FHA loan is the occupancy requirement. When you secure an FHA loan, you are required to live in the property as your primary residence for at least one year.
This requirement is to ensure that the loan is being used for homeownership, not purely investment purposes. This can make FHA loans less suitable for buyers who are solely focused on investment properties. However, there’s a way to use FHA loans for rental income without violating the occupancy requirement.
FHA loans allow borrowers to purchase multifamily properties, such as duplexes, triplexes, or fourplexes. The borrower can live in one of the units as their primary residence while renting out the others. This way, the borrower meets the occupancy requirement and can still generate rental income from the other units.
After fulfilling the one-year occupancy requirement, you may even have the option to move out and rent the entire property, turning it into a full-fledged rental property.
Can you assume an FHA loan as an investment property?
Another question that often comes up is whether borrowers can assume an FHA loan as an investment property. The concept of loan assumption means that the buyer takes over a seller’s existing mortgage rather than securing a new loan.
While the FHA allows for loan assumptions, specific criteria must be met, especially when the loan is being assumed for an FHA investment property. In general, FHA loans are only assumable if the new borrower intends to occupy the property as their primary residence.
This means that an investor or non-occupant buyer cannot assume an FHA loan for an investment property unless they plan to live in the property for at least one year.
3 Ways An FHA Loan Can Be Used for Rental Property
While FHA loans are not designed for investment properties, there are ways in which an FHA loan can still be used for rental purposes. Here are some ways this can work:
1. Purchase a 2-4 Unit Property and Rent Out the Extra Units
One of the most common ways to use an FHA loan for rental property is by purchasing a 2-4 unit property. This setup allows you to live in one unit as your primary residence and rent out the other units. Not only does this fulfill the FHA’s occupancy requirement, but it also allows you to collect rental income from the other units.
This is a great way to start building your real estate investment portfolio with an FHA loan, especially if you are new to real estate investing. Once you’ve met the one-year occupancy requirement, you could convert the entire property into a full rental property by renting out all the units.
2. Convert Your Primary Residence Into a Rental Property
If you’ve already used an FHA loan to purchase a home and have lived in the property for at least one year, you can convert your primary residence into a rental property. This is a flexible option for those who might need to move for work or personal reasons but still want to keep the property as a source of rental income.
As long as you’ve met the FHA’s occupancy requirements, you are free to move out and rent the property. This allows you to continue benefiting from the property as an investment without violating the terms of the FHA loan.
3. Refinance to a Conventional Loan for More Flexibility
If you’ve fulfilled the FHA occupancy requirement and are ready to fully transition your property into an investment, refinancing to a conventional loan could be the next smart move. Conventional loans have more flexible occupancy requirements than FHA and other government-backed loans, especially when it comes to rental properties.
Another appealing benefit of refinancing from FHA to conventional is the ability to eliminate the FHA mortgage insurance premium (MIP), which is typically required when the down payment is less than 20%. By removing this added cost, you can lower your monthly payments, which means more money in your pocket and more potential rental income.
Refinancing also opens the door to scaling your investment strategy.
With fewer constraints, managing multiple rental properties becomes easier, and you can make the most of your growing portfolio. While FHA loans may not be the ideal fit for every investor, they offer unique advantages, particularly when it comes to purchasing multifamily properties and getting your foot in the door of the real estate market.
Emily Kittle is an experienced underwriter with a strong background in risk assessment, training, and loan decision-making. She excels at solving complex mortgage challenges and guiding loans to closing using creativity and critical thinking.
