FHA Secondary Residence: What Are the Rules?

The Federal Housing Administration (FHA) offers government-backed mortgage insurance on loans made by approved private lenders. Established by the National Housing Act of 1934, the FHA’s creation aimed to stabilize a struggling housing market during the Great Depression. This initiative sought to make homeownership more attainable for a broader segment of the population. The FHA continues to provide mortgage insurance, which protects lenders from losses, thereby encouraging them to offer mortgages with more accessible terms.

FHA Loan Primary Purpose

FHA loans are designed to facilitate homeownership for individuals who intend to use the property as their primary residence, promoting owner-occupied housing and stable communities. Consequently, these loans are not intended for the purchase of secondary residences or investment properties. The FHA defines a primary residence as the dwelling where the borrower maintains their permanent abode and occupies for the majority of the calendar year.

A borrower securing an FHA loan must commit to occupying the property as their principal residence within 60 days of the loan closing. This occupancy must then be maintained for at least one year following that initial move-in. These requirements ensure the program fosters owner-occupancy rather than speculative real estate ventures.

Defining Occupancy and Residency

From a lending perspective, properties are classified based on the owner’s intended use, which impacts loan eligibility and terms. A primary residence is considered the borrower’s main home, where they reside for the majority of the year, serve as their legal address for documents such as tax returns, and is often located near their employment. Lenders offer the most favorable mortgage rates for primary residences due to lower perceived risk of default.

A secondary residence, or second home, is a dwelling used periodically by the owner, such as a vacation home, but it is not the owner’s main abode and is generally not rented out. Lenders classify these based on factors like their location in a vacation area, distance from the primary home, and the explicit intent that the property will not be used for income generation.

Conversely, an investment property is acquired with the primary goal of generating rental income or capital appreciation through resale, rather than for the owner’s personal occupancy. These properties are considered higher risk by lenders, as they are often the first asset from which an owner might cease payments during financial hardship. Financing for investment properties involves more stringent terms and higher interest rates.

FHA Occupancy Requirements and Certification

To ensure adherence to its primary residence mandate, the FHA imposes specific occupancy requirements on borrowers. HUD 4000.1 outlines these rules, making occupancy a condition for loan approval.

As part of the closing process, borrowers are required to sign an Occupancy Affidavit or Certification. This document affirms their intent to occupy the property as their principal residence. Making false statements on this affidavit can lead to severe consequences, including legal prosecution under federal statutes, substantial fines, or imprisonment. Lenders may verify occupancy through various means, including reviewing utility setups, employment locations, and, in some cases, conducting property inspections after closing.

While the general rule requires owner-occupancy, limited exceptions can exist, such as situations involving non-occupying co-borrowers. In these cases, at least one borrower must still meet the owner-occupancy requirement for the specified period. The purpose of these measures is to safeguard the FHA’s mortgage insurance fund and ensure that the program primarily supports stable, owner-occupied housing.

Alternatives for Non-Primary Residences

Since FHA loans are exclusively for primary residences, individuals seeking to purchase a secondary home or investment property must explore alternative financing options. Conventional loans are the most common avenue for these types of properties. Unlike FHA loans, conventional loans offer flexibility regarding occupancy, allowing financing for primary, secondary, and investment properties.

The terms for conventional loans on non-primary residences differ from those for primary homes. Down payment requirements for a secondary home range from 10% to 20% or more, while investment properties require a higher down payment, sometimes 15% to 25%. This contrasts with FHA loans, which can permit down payments as low as 3.5% for borrowers with credit scores of 580 or higher.

Credit score requirements are stricter for conventional loans, particularly for secondary homes and investment properties, necessitating a minimum FICO score of 620, with higher scores resulting in better terms. Interest rates for secondary homes and investment properties are higher than those for primary residences due to increased risk perceived by lenders. These factors mean conventional financing for non-primary residences requires a stronger financial profile from the borrower.