Can I Buy a Second Home With an FHA Loan?

An FHA loan, backed by the Federal Housing Administration, is a mortgage product designed to make homeownership more attainable for a broader range of individuals. This program aims to assist those who might not qualify for conventional loans due to lower credit scores or limited funds for a down payment. While FHA loans offer favorable terms, they are primarily intended for specific housing needs. A common question arises regarding their use for purchasing a second home.

FHA Primary Residence Requirement

FHA loans strictly require the financed property to serve as the borrower’s primary residence. This means the home must be where the borrower lives for the majority of the year. Borrowers are generally required to occupy the property within 60 days of closing and intend to live there for at least one year. This requirement ensures the FHA program facilitates stable homeownership, rather than supporting real estate investment or vacation property acquisition.

The FHA program prioritizes owner-occupancy to direct its benefits towards primary housing needs. This primary residence rule prevents the use of these government-backed loans for properties that are not the borrower’s main dwelling. This core requirement generally precludes the use of FHA loans for typical second homes or vacation properties.

Specific Exceptions for FHA Loan Use

While FHA loans are typically restricted to primary residences, certain specific circumstances allow for their use, though the primary residence rule still applies to the newly financed property.

Multi-Unit Properties

An FHA loan can be used to purchase a multi-unit property (two to four units), provided the borrower occupies one unit as their primary residence. Rental income from other units can often help qualify for the loan.

Employment Relocation

If a borrower has an existing FHA-financed home and must move a significant distance (typically 100 miles or more) for a new job, they may be eligible for another FHA loan on a new primary residence. The original FHA-financed home can then be rented out or sold, but the new property must become the borrower’s main dwelling.

Increased Family Size

A new FHA loan might be considered for a growing family requiring a larger home, even if the borrower already has an FHA-financed home. Qualification requires meeting specific equity requirements on their existing FHA-financed property. The intent to occupy the new property as their primary residence remains paramount.

Co-Borrower Vacating

If a co-borrower on an existing FHA loan vacates the property, such as in a divorce, the remaining borrower may obtain a new FHA loan for a new primary residence if they choose to move out of the jointly owned property. In all these scenarios, the FHA’s core requirement that the financed property be the borrower’s primary residence is maintained.

General FHA Loan Requirements

Even when an FHA loan exception applies, borrowers must satisfy all general FHA eligibility criteria.

Credit Score

A minimum credit score of 580 is generally required to qualify for the lowest down payment of 3.5%. Borrowers with credit scores between 500 and 579 may still be eligible but will typically need a higher down payment, often 10%.

Debt-to-Income (DTI) Ratios

DTI ratios are evaluated to ensure a borrower’s ability to manage monthly mortgage payments. While FHA guidelines can be more flexible than conventional loans, general DTI limits typically fall around 43% to 50% for housing expenses and total debt.

Mortgage Insurance Premiums (MIP)

The FHA mandates the payment of MIP, which includes an upfront premium (generally 1.75% of the loan amount) and annual premiums. Annual premiums vary based on loan-to-value, loan term, and loan amount.

Property Eligibility Standards

The property must meet the Department of Housing and Urban Development’s (HUD) minimum property standards, ensuring the home is safe, sound, and secure. An FHA appraisal assesses these standards and the property’s market value. FHA loans are also subject to loan limits, which vary by county and are adjusted annually.

Exploring Other Financing Options

Given that FHA loans are generally not designed for typical second homes or investment properties, individuals seeking to purchase such properties often explore alternative financing solutions.

Conventional Loans

Conventional loans are a common option for second homes or investment properties. These loans typically require higher down payments, often ranging from 10% to 20% for a second home and 20% to 25% or more for an investment property, compared to FHA’s low down payment. Conventional loans also generally demand higher credit scores and lower debt-to-income ratios than FHA loans. Interest rates for second homes and investment properties are frequently higher than those for primary residences, reflecting increased risk for lenders. Borrowers may also encounter stricter underwriting criteria and potentially higher closing costs.

Jumbo and Portfolio Loans

For properties exceeding conventional loan limits, jumbo loans provide financing for larger amounts. These loans are designed for high-value properties and often have more stringent credit and down payment requirements. Portfolio loans, offered directly by lenders and kept within their own portfolio, can be another option for unique situations or properties that do not fit standard lending criteria. These alternatives come with different terms, rates, and eligibility criteria, catering to diverse property acquisition goals.