FHA Loan for Investment Properties
One of the benefits of an FHA loan is the very low down payment. Meanwhile, investment loans typically have a much higher down payment requirement. Therefore, it would be helpful to many first time investors if you could use an FHA loan for investment properties.
FHA guidelines do not permit borrowers to use an FHA loan for investment properties. However, there are alternative strategies to utilize FHA loans to purchase investment properties without violating the terms of the loan agreement.
FHA Investment Property Guidelines
HUD’s guidelines regarding investment properties are clear in that FHA loans must only be used to purchase primary residences.
While FHA loans are intended to be used for primary residences, there are strategies to use an FHA loan for investment properties.
The primary residence requirement for FHA loans states you must live in the property for the first 12 months making it your primary residence for the first year. After one year, you can retain that property as an investment and move to a different home.
After the first year, you are permitted to move out to rent it as an investment property while retaining your FHA loan.
This is the loophole in the HUD guidelines which allow you to purchase investment properties with an FHA loan. This includes multi family buildings up to 4 units. You only need the patience to live in the property for a year before moving out.
Even better news is you are allowed to get another FHA loan for your next property. However, the property must be at least 100 miles from your last home or it must be considered to be an upgrade.
5 Steps to Buying Investment Properties with an FHA Loan
Now that you know you can purchase investment properties with an FHA loan, here are the steps to making it happen.
- First, get pre-approved by a lender for your FHA loan. It is important to know what your buying power is before looking at homes in any price range
- Identify a home in an area that is best suited for investment purposes. Remember, if this is truly an investment then the home needs to be one that can be rented easily or is located in an area where the values are expected to climb. You should consider multi family homes in your search because you can live in one unit while renting out the others.
- After you close and have moved in, begin planning your next purchase. Remember that FHA guidelines require the next home either be an obvious upgrade vs where you live now, or must be at least 100 miles away.
- Get pre-approved for your next mortgage. Keep in mind you will need to qualify with the existing mortgage as part of your DTI calculation. At some point, your income will no longer support the additional mortgages. However, you are permitted to use 75% of the rent from the building as part of your income (excluding the unit you plan to move into).
- Move into your new investment property and rent the one you just vacated. Congratulations, you now own two properties.
Continue this process until you no longer qualify for another mortgage, or you get tired of moving. This is a great way to build wealth.
Buying 3-4 Unit Investment Properties with an FHA Loan
When purchasing a 3 or 4 unit property with an FHA loan, the lender is required to check the home’s ability to be self sufficient. This is called the FHA self sufficiency test (read more here).
The FHA self sufficiency test is there to make sure the rental income for the building is high enough to cover the monthly mortgage payment. This is a good thing for you as the buyer because if the property is not self sufficient, then it likely is not going to be a very good investment.
FHA Investment Property Refinancing
If you own a home as an investment and no longer live there, you may refinance that home with an FHA streamline refinance if your existing mortgage is an FHA loan.
If the investment property is not currently financed with an FHA loan and you do not live in the property, you cannot refinance into an FHA loan.
Rates for FHA loans are going to be better than what you will find if you were refinancing with a traditional investment (non-FHA) loan. However, you will have the FHA mortgage insurance which will add to your monthly payment.
How Many FHA Loans Can You Have?
In theory, you should have just one FHA Loan. However, there are many instances where people own two homes with FHA financing on each. In this scenario, they purchased the first home as their primary residence using FHA financing, then purchased a new home also with an FHA loan without selling their first home.