Web Content Viewer

FHA Loan for Investment Properties

Everything You Need to Know About Requirements and Limits

Real estate investing offers a strong path to building personal wealth, with loans often helping investors purchase properties. When financing an investment or rental property, some consider Federal Housing Administration (FHA) loans. FHA loans can offer benefits such as a low down payment, flexible credit score requirements, and more. However, before you commit, make sure you understand property requirements, financial requirements, and other considerations.

Can You Use an FHA Loan for an Investment Property?

You can only use an FHA loan to buy an investment property if you meet certain requirements. These loans are not intended for investments, but instead to support homebuyers seeking a primary residence. However, by meeting FHA's property and financial criteria and staying within loan limits, you can potentially fund your investment.

FHA Loan Investment Property Requirements

FHA loans have requirements the property secured by the loan must meet before closing, including:

Owner-occupied: The FHA requires you to make one unit in the building your primary residence. You must move in within 60 days of closing and live there for at least one year. While you can rent out the other units immediately to help pay your mortgage, you must wait until the one-year mark before moving out and renting your own unit.
Appraisal: All properties must undergo an appraisal from an FHA-approved appraiser. The house must meet Minimum Property Standards (MPS), which means it’s safe, has utilities, and is in good condition. If not, repairs are required or other options considered.
Property type: The FHA only loans money for certain types of properties. These include single-family homes, condos, townhomes, and two- to four-unit homes. FHA loans don't cover properties with more than four units.
The Self-Sufficiency Test: If you’re buying a 3- or 4-unit property, the property must pass a "Self-Sufficiency Test." This means the projected rental income (minus a 25% vacancy factor) must be enough to cover the entire mortgage payment. You can buy a duplex with an FHA loan if you live in one unit and rent the other, and the Self-Sufficiency Test wouldn’t apply.

Financial Requirements for Investment Properties

Whether an FHA loan for a rental property is right for you depends on your situation. Consider these pros and cons:

Credit score: The FHA requires a qualifying credit score, which affects your interest rate and down payment.
Debt-to-income (DTI) ratio: Your DTI ratio measures how much of your monthly income goes to pay your debts. This helps lenders verify if you can consistently pay your mortgage.
Steady income: Lenders require two years of consistent income, from paychecks or other sources such as alimony or child support.
Mortgage Insurance Premium (MIP): FHA loans require borrowers to pay MIP, which includes an upfront fee and a monthly premium.
Down payment: You’ll have to make a down payment on the property.

FHA Loan Down Payments for Investment Properties

FHA loan down payment percentages are the same for single-family homes and for properties with up to four units. You can usually make a down payment as low as 3.5% of the purchase price if your credit score is at least 580. Typically, you must make a 10% down payment when your credit score is below 580.

For example, let’s imagine that you want to buy a duplex that costs $375,000. With a credit score of 580, you would need a 3.5% down payment, which calculates to a $13,125 down payment. With a credit score below 580, your down payment would need to be 10%, or $37,500. If you are a Freedom Mortgage customer, primary borrowers can check their credit score on our mobile app.

FHA Loan Limits for Investment Properties

FHA loans also have limits, which cap the amount of money you can borrow to buy a home. These FHA loan limits vary by county across the United States and are based on the county’s median house price and household income.

The good news is that these limits are higher for two-, three-, and four-family homes than for single-family homes. This means you may be able to buy a more expensive home with an FHA loan if the property also has rental units.

Is Buying a Rental Property with an FHA Loan a Good Idea?

Whether an FHA loan is right for a rental property depends on your situation. Consider these potential pros and cons:

Pros	Cons
Easier qualification: Credit score and DTI requirements tend to be more relaxed than those for conventional loans. Lower interest rates: FHA loans often offer competitive interest rates. Low down payment: You could potentially have a down payment of only 3.5%. Option to rehabilitate: You can get an FHA 203(k) loan, which combines the purchase and remodel loans. House hacking: Rental earnings can go back into the property to increase its value or address repairs.	Landlord responsibilities: You’ll be a landlord and subject to federal and local laws. Occupancy requirements: You’ll need to live in the property for at least a year. Mortgage insurance: FHA loans have an up-front insurance fee and a monthly premium. Property restrictions: You can only use an FHA loan on investment properties with 2–4 units. Loan limits: You’re only allowed to borrow up to the FHA’s set limits. Appraisals: The FHA appraisal process can take time, with a variety of requirements that must be met.

FHA Loan for Investment Property Alternatives

If an FHA loan isn’t right for you, there are some alternatives to consider:

Conventional loans: You may qualify for a conventional loan, which does not have the same limitations as an FHA loan and can have more favorable terms.
Home equity loans: If you own a home, you can borrow against its equity to buy an investment property.
Debt Service Coverage Ratio (DSCR) loans: Some lenders may offer DSCR loans, which are based on a property’s rental income potential covering the loan payments.
Commercial loans: You can use a commercial loan to buy your property.

Consider speaking with a loan advisor, such as those at Freedom Mortgage, to discuss your specific investment goals and financial needs.

Final Thoughts: FHA Loan for Investment Properties

Using an FHA loan for a rental property can be a great way to achieve your investment goals. However, there are a variety of requirements that must be met. Review the potential advantages and disadvantages and confirm your eligibility. If you’re ready to start on your FHA loan, Freedom Mortgage is a top FHA lender in the United States, and we’re ready to help you get started today.