Can You Buy an Investment Property With an FHA Loan?

FHA loans, backed by the Federal Housing Administration, aim to make homeownership more accessible, particularly for individuals who might not qualify for conventional loans. While not designed for pure investment properties, a pathway exists for multi-unit dwellings. This allows a borrower to acquire a property with multiple units, reside in one, and potentially generate rental income from the others, aligning with the FHA’s owner-occupancy mission.

FHA Owner-Occupancy Rules

A fundamental condition for securing an FHA loan is the owner-occupancy requirement: the borrower must intend to use the property as their primary residence. This means occupying the property within 60 days of closing and for at least one year. This rule applies uniformly, even for multi-unit properties.

For properties with two to four units, the borrower must live in one unit. This distinguishes FHA financing from conventional investment property loans, which do not require owner-occupancy. While a borrower can benefit from potential rental income, the loan’s primary intent remains facilitating homeownership. Pure investment properties, such as vacation homes or those intended for immediate rental without owner-occupancy, do not qualify for FHA financing.

Eligible Property Types and Rental Income Use

FHA loans can finance single-family homes, condominiums, and multi-family properties with up to four units. For multi-unit properties, the owner-occupancy rule requires the borrower to reside in one unit. This allows individuals to purchase duplexes, triplexes, or fourplexes, living in one and renting out the others.

A key advantage of using an FHA loan for multi-unit properties is considering projected rental income from non-occupied units to help qualify. Lenders typically factor in 75% of the appraised fair market rent or the actual lease amount, whichever is less. The remaining 25% accounts for potential vacancies, maintenance, and other landlord expenses.

For properties with three or four units, the FHA implements a “self-sufficiency test.” This test requires the property’s net rental income, after deductions, to cover the monthly Principal, Interest, Taxes, and Insurance (PITI) payments.

Borrower Qualification Standards

Securing an FHA loan for a multi-unit property involves meeting specific borrower qualification criteria. A borrower’s credit score determines the required down payment. A score of 580 or higher generally qualifies for the minimum 3.5% down payment. If a score falls between 500 and 579, a 10% down payment is typically required. Many FHA-approved lenders often set their own minimum credit score requirements, frequently seeking scores of at least 620.

Debt-to-income (DTI) ratios are also a component of FHA loan qualification, assessing a borrower’s ability to manage monthly housing expenses and other debts. FHA guidelines suggest a front-end DTI ratio (housing expenses) of up to 31% and a back-end DTI ratio (total debt) of up to 43%. Lenders may allow higher DTI ratios, sometimes up to 50% or 57%, with strong compensating factors like significant cash reserves or a history of managing similar housing payments.

FHA loans also mandate Mortgage Insurance Premiums (MIP), which protect the lender in case of default. This includes an upfront MIP, 1.75% of the loan amount, which can be paid at closing or rolled into the loan. An annual MIP is assessed, typically ranging from 0.15% to 0.75% of the loan amount, and is divided into monthly payments. For most borrowers, the annual MIP is around 0.55%. This annual MIP is generally paid for the entire loan term unless the initial down payment was 10% or more, in which case it may be canceled after 11 years.