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How To Utilize FHA Loans For Investments

Utilizing a Federal Housing Administration (FHA) loan for an investment property may appear appealing, yet it presents complexities in real estate financing. FHA loans are typically designated for primary residences and aren’t meant for direct investment property funding, with only a few exceptions allowed. 

Delving deeper into FHA’s occupancy criteria reveals insights into leveraging FHA loans for your future real estate investments.

Understanding FHA Loans

FHA loans, backed by the Federal Housing Administration, cater to low- and moderate-income buyers, facilitating homeownership dreams with reduced upfront expenses.

Eligible borrowers benefit from lower down payment demands and minimum credit scores, making FHA loans a preferred option for first-time homebuyers.

FHA Requirements For Occupancy

The Federal Housing Administration mandates that you reside in the purchased home as your primary residence for a year, ensuring it meets livability standards and that you move in within 60 days of closing. While FHA loans typically apply to residential properties, exceptions exist for certain commercial properties or the acquisition of a multiunit dwelling (with a limit of four units), where the condition is that you occupy one of the units, allowing the others to be rented out.

Alternatively, if your job necessitates relocation and you require a second home, you may rent out your initial home after fulfilling the one-year occupancy requirement outlined by FHA guidelines. Furthermore, you retain the flexibility to lease out rooms in your primary residence at any time, even with an FHA loan. Moreover, in situations where health issues or other reasons impede your ability to work, exploring room rentals within your home as an alternative income source could be an option. Refer to your loan application for specifics on FHA special provisions that may apply.

Is it Possible for FHA Loans to Fund Investment Properties?

No, FHA loans cannot finance investment properties, except as outlined in the exceptions below.

Understanding Investment Properties: What They Are and How They Work

An investment property is purchased with the expectation that its value will appreciate over time and/or yield steady rental income. If the property is not your primary residence, it usually falls under the categories of an investment property or second home. Various mortgage options are available for financing investment properties, with conventional home loans and jumbo loans being favored choices. FHA loans, due to their restrictions, are generally not utilized for real estate investment purposes.

FHA Loan Exceptions for Investment Properties

While exceptions exist, it’s important to be aware of the FHA investment property guidelines.

Multi-unit Property

Certain investors leverage FHA loans to acquire multiunit or multifamily properties of up to four units. In this scenario, a multiunit residence can serve as the owner’s primary residence (occupying one unit) while renting out the remaining units to generate rental income. By adopting this approach, property owners may potentially generate adequate rental income to offset living costs and even yield a profit.

Primary Residence

If you have to move for work and need a second home, you might be able to rent out your initial home after living in it for a year. Renting out rooms in your primary residence is allowed under FHA rules, as long as you’re living there yourself.

Refinance Your FHA Loan

Refinancing your FHA loan requires meeting specific criteria. You need to have resided in the property for at least 210 days after closing and made a minimum of six monthly payments on your FHA mortgage. Once these conditions are met, you can explore options like an FHA Streamline Refinance to potentially reduce your interest rate and monthly payments. Alternatively, switching to a conventional loan is possible, but ensure your loan-to-value ratio stays below 80% to avoid private mortgage insurance (PMI).

Note that if your FHA loan is under a year old, no payments must be overdue by more than 90 days. For loans older than a year, a single late payment within the last 12 months is permissible, excluding any late payments made in the past 90 days. On a positive note, FHA streamline refinances are known for their swift approval and closure processes, often requiring minimal or no employment, income, credit score checks, or even a home appraisal, depending on your circumstances.

Key Takeaways

FHA loans are typically meant for financing primary residences, not investment properties. However, there are a few exceptions where real estate investors could potentially utilize FHA loans to purchase investment properties.

Pursue your investment aspirations and seek mortgage approval with Elevation Mortgage today to propel your financial goals forward.

Picture of Reed Letson

Reed Letson

Reed offers two decades of expertise as a mortgage broker, focusing on veterans and first-time home buyers. With a strong grasp of real estate and mortgage markets, he empowers clients with practical insights. Reed's passion is guiding clients to build wealth through real estate investments and financing solutions.

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