Can You Use an FHA Loan for Investment Property?

FHA loans are a popular financing option for homebuyers due to their lower down payment requirements and flexible credit qualifications. However, using these loans for investment properties comes with specific guidelines.

Basic Eligibility

To qualify for an FHA loan, applicants must meet criteria set by the Federal Housing Administration. A minimum credit score of 580 allows for a 3.5% down payment, while scores between 500 and 579 require a 10% down payment. This flexibility helps individuals who may not meet conventional loan standards.

Borrowers must verify their income by providing pay stubs, W-2 forms, and tax returns, demonstrating steady employment and sufficient income. The debt-to-income (DTI) ratio should not exceed 43%, ensuring borrowers can manage their financial responsibilities. Applicants must also have lawful U.S. residency and a valid Social Security number. FHA loans are strictly for primary residences, not investment properties, underscoring the program’s focus on homeownership.

Owner-Occupancy Stipulations

Borrowers are required to occupy the property as their primary residence within 60 days of closing. This prevents FHA loans from being used for investment purposes and supports the program’s goal of promoting stable housing. Borrowers must sign an affidavit confirming their intent to live in the home, and lenders may verify compliance through utility bills or other residency evidence.

Exceptions to this rule may be granted for military deployment or major employment changes, allowing temporary rental of the property. These exceptions require documentation and lender approval, balancing flexibility with the program’s primary goals.

Multi-Unit Property Options

Borrowers can use FHA loans for multi-unit properties, up to four units, as long as they live in one unit. This option allows them to generate rental income, which can offset mortgage costs and improve financial stability. Rental income from other units may be factored into the borrower’s DTI ratio, potentially increasing purchasing power.

The property must pass an FHA appraisal to meet HUD safety and livability standards. This appraisal is stricter than conventional ones, focusing on structural integrity and safety. Borrowers may need to make repairs or upgrades, which can be financed through an FHA 203(k) rehabilitation loan, allowing renovation costs to be included in the loan amount.

Documentation Criteria

The FHA loan process requires thorough documentation. Borrowers must provide a government-issued ID and, if applicable, proof of legal residency. Financial documentation includes bank statements, pay stubs, and evidence of additional income sources like bonuses or alimony. Significant deposits must be explained for transparency.

Loan Limits

FHA loans have specific limits based on property location and type, updated annually by the Federal Housing Administration. For 2023, the “floor” limit for low-cost areas is $472,030 for a single-family home, while the “ceiling” for high-cost areas is $1,089,300. Multi-unit properties have higher limits, with four-unit homes in high-cost areas capped at $2,096,200.

These limits are calculated using conforming loan limits set by the Federal Housing Finance Agency (FHFA). FHA loan limits are 65% of the conforming limit for low-cost areas and 150% for high-cost areas. Borrowers must check their county’s specific limits, as exceeding them disqualifies the loan from FHA backing. In such cases, borrowers must increase their down payment or explore other financing options. Understanding these limits is crucial for maximizing purchasing power.