Can You Use an FHA Loan for an Investment Property?

We have all seen it before with new real estate investors. You locate a piece of property that has amazing potential, but you do not have the twenty percent down payment for a traditional investment loan. Not surprisingly, your immediate thoughts turn to FHA loans. Because FHA loans have low down payment requirements and flexible credit standards, they appear to be the answer to getting involved in the property business – especially when you want to apply for an FHA loan in SC. But there is a hitch.

The Federal Housing Administration created an FHA loan program with the intention of helping Americans purchase homes that they would reside in. Can you use an FHA loan for an investment property? It was not created as a method for Americans to build an empire based on real property. But a clever borrower will know that there are ways within the system that allow them to succeed with an FHA loan. Allow BrickWood Mortgage to delve into this area! 

The Primary Residence Rule Explained

Before we get into these strategies, it is essential to note that there is a core requirement. Once you finalize an FHA loan, you have to sign an agreement stating that you plan to reside within it as your main residence. It is common knowledge that you have to move into it within sixty days after acquiring it and reside there for at least a year.

As soon as you attempt to use it for acquiring an FHA loan and applying it for a property without your intention to reside there, it becomes mortgage fraud. We highly recommend our clients be very open with their goals. And as a fact, FHA loans are exclusively meant for owner-occupants. However, it does not imply that you cannot generate any revenues.

Methods for Earning Income with an FHA-Insured Mortgage

The best method for applying an FHA loan towards investment would be via what some people refer to as house hacking. FHA loans for investment property allow you to buy a multi-unit property, up to a maximum of four, as long as you occupy one of them. You have the option of buying a duplex, triplex, and even a fourplex with a low down payment and occupying one unit while renting out the remaining. You would then get to enjoy your mortgage payments being partially offset by your rental income, meaning you get your housing for free.

It might be possible to start an income stream by purchasing a single-family dwelling with an FHA loan and then renting out rooms. So long as you are residing there as your primary residence, it satisfies FHA regulations. It would be optimal for someone who purchases a dwelling with more space than they absolutely need.

Moving Out and Keeping the Property

Life will get in the way, and things will change. Although you will be required to live within the house for at least a year, you are not bound to that house for life. Once you have satisfied your occupancy requirement, you can move on and turn your house into a rental property. This is where utilizing an FHA mortgage for an investment property becomes a strategic advantage. You will then be able to get a different mortgage for a new primary residence. Many people use this strategy as a plan for buying rental properties.

Alternative Financing for Pure Investors

But if you absolutely have no alternative but to reside elsewhere, then an FHA loan will not be an appropriate option for you. As an investment property that doesn’t have you as an occupant, we would recommend you check out conventional investment loans. These loans will have a higher down payment requirement, which will be anything from fifteen percent to twenty-five percent, and will also have higher credit requirements. You could also opt for a DSCR loan or explore options specifically designed for an FHA mortgage rental property.

Begin Your Real Estate Career on the Right Track

Utilizing an FHA loan can be an amazing door opener for entry into real estate investment if done within guidelines. Whether it be house hacking an investment property with multiple units or occupying a home before acquiring it as a rental property, it is imperative that occupancy guidelines be understood. 

At BrickWood Mortgage, we assist our clients daily in understanding and identifying the optimal method for acquiring a loan that meets your long-term wealth strategy on a daily basis. Contact us today if you are ready to identify your opportunities!