Can You Get an FHA Loan for a Rental Property?

FHA loans can be obtained for properties with rental units. While primarily for owner-occupied residences, they can be used for multi-unit properties with two to four units. The borrower must occupy one unit as their primary residence, allowing for potential rental income from other units.

FHA Occupancy Rules for Multi-Unit Properties

The FHA mandates that the borrower must establish the property as their primary residence, moving into one of the units typically within 60 days of the loan closing date. This occupancy must then be maintained for at least one year following that initial move-in.

The remaining units beyond the one occupied by the borrower can be rented out to tenants. This arrangement allows borrowers to potentially use rental income to help offset their mortgage payments, providing a financial benefit.

FHA loans cannot be used for properties where the borrower does not intend to reside on-site. Using an FHA loan solely as an investment is not permitted. Violating occupancy terms can lead to legal liability.

The FHA also restricts the total number of units in such properties to a maximum of four. Properties with five or more units typically fall under different FHA multifamily financing programs, which have distinct requirements not applicable to this residential loan type. This unit limitation ensures the program remains focused on owner-occupied residential properties with a component of rental potential.

Eligibility Criteria for FHA Multi-Unit Loans

Qualifying for an FHA loan on a multi-unit property involves meeting specific financial and property standards. Borrowers generally need a minimum FICO credit score of 580 to qualify for the lowest down payment of 3.5%. If a credit score falls between 500 and 579, a higher down payment of 10% is typically required. Many private lenders, however, may set their own minimum credit score requirements, often preferring a score of 620 or higher.

Debt-to-income (DTI) ratio is another important factor, measuring monthly debt payments against gross monthly income. The FHA generally allows a maximum DTI of 43%, though some lenders may approve higher ratios, potentially up to 50% or even 56.9%, with compensating factors such as significant cash reserves or strong credit history. For multi-unit properties, lenders can consider a portion of the projected rental income from the non-occupied units to help the borrower qualify. Lenders typically factor in 75% of the projected gross rental income, while accounting for 100% of the property’s expenses, to allow for potential vacancies and maintenance costs.

The property itself must meet FHA Minimum Property Standards (MPS), ensuring it is safe, secure, and sound. An FHA-approved appraiser conducts an appraisal to determine the property’s market value and verify compliance with these standards. This appraisal assesses structural integrity, functional systems like plumbing and electrical, and overall health and safety aspects, such as the absence of lead-based paint hazards. While an FHA appraisal is required, it is distinct from a home inspection, which is optional but highly recommended for a thorough understanding of the property’s condition.

FHA loans also have specific loan limits that vary by county and are updated annually to reflect housing costs. These limits are higher for multi-unit properties compared to single-unit homes, recognizing the increased value of such properties. Borrowers must ensure the loan amount they seek falls within the established FHA limits for their specific property type and geographic area.

Applying for an FHA Multi-Unit Loan

The process of applying for an FHA multi-unit loan begins with finding an FHA-approved lender. The FHA does not directly issue loans; instead, it insures loans made by private lenders, including banks, credit unions, and mortgage companies. It is beneficial to seek out lenders with experience in FHA multi-unit financing, as their internal standards may vary.

Obtaining pre-approval is a practical initial step, providing a clear understanding of the maximum loan amount for which one qualifies. This process involves submitting financial documentation, such as income verification, asset statements, and allowing for a credit check. Pre-approval can typically be completed within a week and strengthens a buyer’s offer in a competitive market.

Once pre-approved, the property search can commence, focusing on 2-4 unit properties that meet the owner-occupancy requirement. After a suitable property is identified and an offer accepted, the loan application proceeds to the appraisal and underwriting stages. An FHA-approved appraiser will assess the property’s value and ensure it meets the FHA’s minimum property standards for safety, security, and soundness.

Underwriting involves a detailed review of the borrower’s financial information, including creditworthiness, income stability, and debt-to-income ratios, along with the appraisal report. This comprehensive evaluation confirms compliance with both the lender’s and FHA’s guidelines. The entire FHA loan process, from application to closing, generally takes between 30 and 60 days, depending on various factors like the completeness of documentation and the complexity of the property. Upon successful underwriting, the loan moves to closing, where final documents are signed, and the property ownership is transferred.