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FHA Loan For Investment Property: A Complete Guide

3-Minute Read
Published on April 16, 2023

Not everyone planning to pursue real estate investing has enough cash on hand to fund the down payment required for a conventional investment property loan. But if you’re exploring options to jump-start your real estate investing, consider turning your attention toward Federal Housing Administration (FHA) loans because they have more lenient qualification requirements than conventional loans.

FHA loans are government-backed loans, and they are rarely used to fund investment property purchases. But, if you’re willing to live in one unit of a multiunit property for at least a year, an FHA loan may be a great option for you.

Let’s delve into the details of using FHA loans for investment properties and find out why they can’t be used for most investment property purchases.

What Are FHA Loans?

FHA loans are mortgages backed by the Federal Housing Administration through the Department of Housing and Urban Development (HUD). Low- to moderate-income families typically apply for FHA loans because they have low credit score and down payment requirements. Many first-time home buyers use FHA loans because they may qualify for lower closing costs, and the debt-to-income (DTI) ratio requirement is more relaxed.

FHA loans are also considered nonconforming mortgages because they don’t meet Fannie Mae's or Freddie Mac's standards to purchase a property.

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What Are Investment Properties?

Before exploring the nuances of using an FHA loan to purchase an investment property, it’s essential to understand the exact meaning of an investment property. An investment property is real estate purchased to make money and, in many cases, generate ongoing income.

From hard money loans to conventional mortgage loans, many types of loans are available to purchase an investment property, and usually, an FHA loan isn’t an obvious option.

Can You Use An FHA Loan For An Investment Property?

You can only use an FHA loan to buy an investment property if the property is your primary residence and meets all other FHA loan criteria. Because most investors don’t plan to live in their investment properties, FHA loans usually don’t work for investors.

For example, if you discover an affordable multiunit property while searching for properties to flip, consider purchasing the property, living in one of the units and renting out the other units to offset the monthly mortgage payment and potentially turn a profit. You’ll just need to make sure the residence meets all FHA loan requirements.

FHA Loan Requirements

The most important requirement is that your FHA loan funds the purchase of a primary residence. Here are the other requirements you must meet to qualify:

  • The home must be appraised and approved by an FHA appraiser.
  • The appraisal must state that the house meets minimum property standards.
  • You must move into the home within 60 days of the closing date.

In addition, borrowers must live in the property for at least 1 year.

Find out if an FHA loan is right for you.

See rates, requirements and benefits.

Explore FHA Loans

How To Use An FHA Loan For Investment Properties

While FHA loans for investment properties aren’t usually permissible, there are exceptions. You can treat a residence purchased with an FHA loan as an investment property or get FHA loan approval for an investment property under certain circumstances. Let’s discuss three of them below.

Rent Out Your Primary Residence

If you relocate for your job and need to buy a second home, you may be allowed to rent your current home purchased with an FHA loan as long as you lived there for at least 1 year. The rental income from your tenants should cover your mortgage payments.

Purchase A Multiunit Home

Borrower can purchase a multiunit property with up to 4 units with an FHA loan. All the units can be occupied by tenants except 1, which you must live in to meet your FHA requirements.  Technically, a home with up to 4 units is a single-family residence, however, a home with 5 or more units is considered a multi-family home. As long as your home meets the requirement of having 2 – 4 units and 1 unit is owner-occupied, you should be fine.

Depending on the rental income from your tenants, you may be able to stay at your property at essentially no monthly cost – and may make extra income from your tenants.

Purchase A Fixer-Upper With An FHA 203(k) Loan

As mentioned earlier, FHA loans have minimum property requirements, but FHA 203(k) loans allow FHA home buyers to buy homes that fail to meet the FHA’s minimum property standards. With an FHA 203(k) loan, you can bundle the cost of repairing the home into the mortgage. Again, you’ll have to live in at least 1 unit of the home, but FHA 203(k) loans work for properties with up to 4 units, like standard FHA loans.

Refinance Your FHA Loan

If you purchased a home with an FHA loan and meet the minimum occupancy requirement, you may be able to refinance your FHA loan to a conventional mortgage. It may be a good choice if your financial circumstances have changed. If your credit score is higher and your income has increased, you may qualify for a conventional loan or another type of home loan with fewer rules for investment properties.

A different type of home loan may allow you to turn a primary residence into an investment property and improve your loan terms. You may end up with a lower interest rate and monthly mortgage payment. If you have more than 20% equity in your home, you may be able to remove private mortgage insurance (PMI) during the refinance.

The Bottom Line: In Rare Situations, You Can Buy A Rental Property With An FHA Loan

Although FHA loans aren’t typically used to purchase investment properties, you can do it under certain circumstances – as long as you meet certain requirements.

Have you found the perfect property to invest in? Take the next step and start the mortgage approval process today.

Find out if an FHA loan is right for you.

See rates, requirements and benefits.

Explore FHA Loans
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Andrew Dehan

Andrew Dehan is a professional writer who writes about real estate and homeownership. He is also a published poet, musician and nature-lover. He lives in metro Detroit with his wife, daughter and dogs.