Can You Rent an FHA Home? Rules and Exceptions

Federal Housing Administration (FHA) loans offer a pathway to homeownership for many individuals, particularly those who might not meet the stringent requirements of conventional mortgages. These government-insured loans feature lower down payment options and more flexible credit criteria, making them a popular choice for first-time homebuyers. This article clarifies the specific rules and limited exceptions governing the rental of FHA-financed properties.

The FHA Owner-Occupancy Requirement

FHA loans are designed to promote homeownership, not to facilitate investment properties. A fundamental requirement of an FHA loan is that the borrower must occupy the property as their primary residence. This typically means the borrower intends to live in the home for the majority of the year. Borrowers are generally required to move into the property within 60 days of the loan closing.

The FHA mandates that at least one borrower must reside in the home for a minimum of 12 months from the date of closing. This occupancy period is a core aspect of the loan agreement, preventing borrowers from using the program for immediate investment purposes. Borrowers affirm their intent to occupy the property as their primary residence by checking the “Primary Residence” box on their Uniform Residential Loan Application at closing.

Specific Situations for Renting

After a homeowner has fulfilled the initial 12-month owner-occupancy requirement, they can generally rent out the FHA-financed property without violating FHA guidelines. However, certain limited circumstances may allow a borrower to rent out an FHA-financed home before this one-year period. These exceptions typically arise from unforeseen life events, and it is important to communicate with the lender in such situations.

Exceptions that may allow renting before the 12-month period include:

• One common exception applies to employment-related relocations, especially if the new job requires moving a significant distance, often more than 100 miles from the current residence.
• Military Permanent Change of Station (PCS) orders. Service members on active duty may be considered owner-occupants even if they cannot physically reside in the property, provided a family member occupies it or the service member intends to occupy it upon discharge. Documentation, such as military orders, is typically required to show the duty station is more than 100 miles away.
• Changes in family size can also warrant an exception if the existing home no longer meets the family’s needs due to an increase in dependents.
• In cases of divorce or legal separation, if one co-borrower moves out, the property can still maintain its owner-occupied status as long as another co-borrower continues to reside in the home.
• FHA loans can be used to purchase multi-unit properties (up to four units), provided the borrower occupies one of the units as their primary residence; the remaining units can be rented out immediately.
• If a homeowner genuinely attempted to sell the property but could not, and moving is necessary, they may discuss options with their lender, as this scenario might also lead to an exception.

Consequences of Non-Compliance

Violating the FHA’s owner-occupancy requirements can lead to serious repercussions for the borrower. When a borrower misrepresents their intent to occupy the property as their primary residence, or if they rent it out without meeting an approved exception, they may be subject to severe penalties. Lenders are authorized to take action if they discover non-compliance.

A primary consequence is loan acceleration, where the lender demands immediate repayment of the entire outstanding loan balance. If the borrower is unable to pay the full amount, the lender may initiate foreclosure proceedings on the property. Beyond financial penalties, misrepresentation of occupancy intent can be considered mortgage fraud, a federal offense. This can result in significant fines, imprisonment, or both. Additionally, borrowers found in violation may become ineligible for future FHA-insured loans, impacting their ability to secure government-backed financing for subsequent home purchases. Lenders may also conduct occupancy checks through various means, including reviewing utility bills, voter registration, or even direct property visits, to verify compliance.