FHA Loan For Investment Property: A Complete Guide

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. If you’re looking at options to jumpstart your investment property purchase, a Federal Housing Administration (FHA) loan may have caught your eye, since FHA loans have less strict qualification requirements than conventional loans. FHA loans, however, are rarely used to fund investment property purchases, due to government constraints.

But if you’re willing to live in one unit of a multi-unit property purchased with your loan, an FHA loan could be a great option for you. Otherwise, it’s probably a good idea to look elsewhere for funding. Let’s delve into the nitty-gritty of how FHA loans for investment property work and 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. These loans are considered nonconforming mortgages and don’t meet Fannie Mae or Freddie Mac standards to purchase a property.

Low-to-moderate income families tend to lean toward FHA loans because of their low down payment and credit score requirements.

What Is An Investment Property?

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

From hard money loans to conventional mortgage loans, many types of loans are available for the purchase of an investment property, but an FHA loan isn’t often an option.

Can You Use An FHA Loan For An Investment Property?

FHA loans must be used for primary residences, and most investors don’t plan to live in an investment property they purchase. For this reason, FHA loans won’t customarily work for investors. However, if your search for properties to flip has uncovered a property you could rent out while living there yourself, you may be in luck. You’ll just want to make sure you understand all FHA loan requirements.

FHA Loan Requirements

The most important requirement, of course, is that your FHA loan be used to fund the purchase of a primary residence. Other requirements you must meet to qualify for an FHA loan include the following:

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

In addition, borrowers must use this property as their primary residence, meaning they must live in it the majority of the year.

How To Use An FHA Loan For Investment Properties

While it’s not usually permissible to treat a residence purchased with an FHA loan as an investment property, or to get FHA loan approval for an investment property, a few notable exceptions are worth considering. Let’s learn about three of them below.

Rent Out Your Primary Residence

If you get relocated for your job and need a second home, you’re may potentially be allowed to rent out your first home that you purchased with an FHA loan, but you do still have to stay there for at least 1 year prior. After that, having tenants to make your mortgage payments may be your best bet, if you are permitted to do so.

Purchase A Multifamily Unit

Borrowers are allowed to purchase what could be considered a “multifamily” property of up to four units with an FHA loan. All the units can be occupied by tenants except one, which you must live in to meet your FHA requirements. Technically, a home with up to 4 units is a single-family residence – so as long as your homes is under that requirement and you inhabit 1 unit, you should be fine.

Depending on how much you charge your tenants, you may be able to stay at your property at essentially no monthly cost – and even have additional income from your renters.

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

As mentioned earlier, FHA loans come with minimum property requirements, but FHA 203(k) loans allow FHA home buyers to buy homes that have failed to meet these requirements. With an FHA 203(k) loan, you can bundle the costs of repairing the home into the mortgage. Again, you’ll have to live in at least one unit of the home, but FHA 203(k) loans work for properties of up to four units, just like regular FHA loans.

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

Although FHA loans aren’t typically used to purchase investment properties, you may still be able to get away with using them under certain circumstances – as long as you meet certain requirements. Whether you’re wanting an FHA loan for an investment property or a traditional home purchase, get started today if an FHA loan seems right for you.