Can You Buy an Investment Property With an FHA Loan?

An FHA loan represents a government-backed mortgage program designed to make homeownership more accessible for individuals and families across the United States. These loans are popular due to their flexible credit requirements and lower down payment options compared to conventional mortgages. While FHA loans are not intended for purely investment-driven purchases, there are specific scenarios where properties with rental potential can be financed, aligning with the program’s primary goal of facilitating owner-occupied housing.

FHA Loan Purpose and Owner-Occupancy Requirement

The fundamental purpose of FHA loans is to facilitate homeownership for individuals who might otherwise face challenges securing financing through traditional lenders. This program primarily aims to help people purchase a home they intend to live in, rather than acquire properties solely for rental income generation. A core tenet of the FHA loan program is the strict owner-occupancy rule, which mandates that the borrower must intend to occupy the financed property as their primary residence. For FHA purposes, “primary residence” means the home where the borrower lives for the majority of the year. Borrowers are generally required to move into the property within 60 days of the loan closing and must reside there for at least one year. Consequently, this core requirement generally prohibits the use of FHA loans for properties where the borrower has no intention of living, such as a vacation home or a property purchased strictly to be rented out to others without the owner residing there. Any attempt to circumvent this rule, such as declaring intent to occupy without actually doing so, can lead to serious consequences, including loan default and potential legal repercussions.

Multi-Unit Property Eligibility

FHA loans can be utilized to purchase dwellings containing two, three, or four units, provided the borrower occupies one of those units as their primary residence. This specific allowance enables individuals to purchase a larger property and reside in one part while potentially generating rental income from the other units. This arrangement allows the borrower to adhere to the FHA’s owner-occupancy mandate while benefiting from the financial advantages of rental income.

The ability to generate rental income from the non-owner-occupied units can significantly help offset mortgage costs, making homeownership more affordable. For instance, a borrower might purchase a duplex, live in one unit, and rent out the other. The rental income can then contribute towards the monthly mortgage payment, property taxes, and insurance, easing the financial burden on the homeowner.

This unique feature of FHA financing provides an accessible pathway to homeownership for those interested in leveraging multi-unit properties without needing a substantial down payment typically required for pure investment properties. This eligibility for multi-unit properties directly addresses the common desire to combine homeownership with an income-generating asset. It transforms what might appear to be an investment property into a primary residence with an ancillary income stream, aligning with the FHA’s mission to promote stable housing. The FHA’s guidelines are carefully structured to ensure that even with multiple units, the primary intent remains owner-occupancy, distinguishing it from loans solely for commercial investment purposes.

Key Requirements for FHA Multi-Unit Loans

The most fundamental requirement remains owner-occupancy; the borrower must undeniably intend to live in one of the units as their primary residence, moving in within a typical timeframe of 60 days post-closing and maintaining residency for at least one year. The property itself must be a 2, 3, or 4-unit dwelling that meets FHA’s minimum property standards, which are assessed during the appraisal process. These standards ensure the property is safe, sound, and sanitary, protecting both the borrower and the FHA from undue risk. The appraisal will also estimate the property’s market value and, crucially, project the potential rental income from the non-owner-occupied units.

A significant aspect of qualifying for FHA multi-unit loans is the self-sufficiency rule. This rule dictates how FHA assesses the potential rental income for qualification purposes. Generally, 75% of the gross projected rental income from the non-owner-occupied units can be considered when determining the borrower’s ability to repay the loan. This projected income, combined with the borrower’s other verifiable income, must demonstrate that the property’s total income can cover the principal, interest, taxes, and insurance (PITI) of the mortgage payment, plus a specific percentage, often around 25% or more, indicating a healthy financial cushion.

Regarding down payment, FHA loans for multi-unit properties typically require a minimum of 3.5% of the purchase price for borrowers with a credit score of 580 or higher. Individuals with lower credit scores, typically between 500 and 579, may still qualify but generally need a larger down payment, often 10%. FHA loans are also subject to specific loan limits that vary by county and are generally higher for multi-unit properties than for single-family homes. Borrowers must ensure the total loan amount falls within these established limits for their specific property type and location.

Finally, borrowers should anticipate paying both an upfront Mortgage Insurance Premium (UFMIP) and annual Mortgage Insurance Premiums (MIP) with FHA loans. The UFMIP is typically 1.75% of the loan amount and can be financed into the loan, while the annual MIP is paid monthly and varies based on the loan amount, loan term, and loan-to-value ratio. These premiums protect the FHA in case of borrower default and are a standard cost associated with this type of financing.