Can I Use an FHA Loan for a Rental Property?

FHA loans are a government-backed mortgage option designed to help individuals and families achieve homeownership. These loans typically feature more flexible qualification requirements compared to conventional mortgages, making them accessible to a broader range of borrowers. While the primary intent of FHA loans is to facilitate the purchase of a principal residence, not an investment property, a specific exception exists for multi-unit dwellings. This allows a borrower to use an FHA loan for a property with multiple units, provided they intend to live in one of the units as their main home.

FHA Loan Purpose and Use

The core principle behind Federal Housing Administration (FHA) loans is to support owner-occupancy, meaning the borrower must reside in the property they purchase as their primary home. A primary residence is defined as the dwelling where the borrower maintains their permanent place of abode and typically occupies for the majority of the calendar year. Borrowers are required to move into the property within 60 days of closing and intend to occupy it for at least one year.

However, FHA guidelines permit the use of these loans for multi-unit properties, specifically those with up to four living units. In such cases, the borrower must still fulfill the owner-occupancy requirement by living in one of the units as their primary residence. The remaining units can then be rented out, offering a pathway for homeowners to generate potential income while still benefiting from the FHA loan program’s features. FHA loans are not intended for properties solely acquired for rental income without the owner residing there.

Qualifying for Multi-Unit FHA Loans

To qualify for an FHA loan on a multi-unit property, the dwelling must consist of two to four units. The borrower is mandated to occupy one of these units as their primary residence, typically requiring them to move in within 60 days of closing and maintain occupancy for a minimum of one year.

All properties financed with an FHA loan, including multi-unit homes, must meet specific property standards set by the Department of Housing and Urban Development (HUD). An FHA-approved appraiser will assess the property’s market value and verify it meets minimum health, safety, and structural requirements. These standards ensure the property is safe, sound, and secure, checking for issues like functional major systems (heating, electrical, plumbing), a roof with at least two years of remaining life, and safe access.

Borrower qualifications also apply, including considerations for credit score, debt-to-income (DTI) ratio, and down payment. While FHA loans are known for their lower minimum down payment requirements, typically 3.5% for borrowers with a credit score of 580 or higher, lenders may have their own specific credit score requirements. Borrowers are also required to pay mortgage insurance premiums (MIP), which include an upfront premium and annual premiums. For three or four-unit properties, lenders generally require verification of three months of principal, interest, taxes, and insurance (PITI) as reserves.

Rental Income and Loan Qualification

When applying for an FHA loan on a multi-unit property, potential rental income from the non-owner-occupied units can be considered to help the borrower qualify. Lenders typically use a portion of the projected rental income, often around 75% of the market rent, to offset the borrower’s housing expenses. The 25% reduction accounts for potential vacancies and maintenance costs.

This factored-in rental income can improve a borrower’s debt-to-income ratio, making it easier to qualify for the loan amount needed for the multi-unit property. To verify this income, lenders may require current lease agreements from existing tenants or rely on a market rent analysis provided by an FHA-approved appraiser. The appraiser will assess comparable rental properties in the area to determine fair market rent for each unit.

For properties with three or four units, FHA guidelines often include a “self-sufficiency test.” This test requires that the property’s net rental income, after accounting for a vacancy factor, must be equal to or greater than the projected monthly mortgage payment, including principal, interest, taxes, and insurance (PITI). If the property does not pass this self-sufficiency test, it may not qualify for FHA financing.