If you’re thinking about buying a house, especially one you would like to rent out, you have a lot to consider, but FHA loans can make your purchasing process much easier. Learn about FHA loans for landlords and how to use them. Explore your options, how to buy, and how to qualify for FHA loans for landlords.
Federal Housing Administration (FHA) loans are federally insured loans, which can enable people to buy homes with lower interest rates and a lower cost of entry. With an FHA loan, you can purchase a 1-4 unit property for a low closing cost and move into one of the units. This allows you to move into a house you own, and may even allow you to rent out part of your property as a landlord.
FHA loans are an easier route to obtaining a mortgage than many other routes. They are government-backed home loans, intended to help borrowers purchase homes more easily than they would otherwise. It is available for lower interest rates and offered to borrowers who have lower credit scores than most other housing lenders. These make for an easier route into homeownership than most other methods.
Can I Buy an Investment Property With an FHA Loan?
Whether or not you can purchase an investment property with an FHA loan depends on a few factors. Most of the time, you cannot buy a property with the explicit intent of renting it out, but there are exceptions that can allow you to get a foot in the door as a landlord. Multifamily units are an acceptable option, provided you live in one of the units. This method, often referred to as house-hacking, can help offset the costs of mortgage payments with your rental income. Additionally, you can rent out a house you bought with an FHA loan if you need to relocate after living there for at least one year.
For example, if you were to buy a duplex with an FHA loan, you could live in one of the units and rent out the other one, which would alleviate your cost of living and may even balance it out entirely or turn a small profit, depending on the rental industry in your area. The same could be done for properties that have up to four units, allowing you to step into the landlord world much more easily than one might assume.
Learn more: How to Prepare to Buy Your First Rental Property – Video
What Kinds of FHA Loans Are There?
Most of the time, an FHA loan refers to a mortgage for a first-time buyer, but there are multiple kinds of FHA loans you could qualify for. The options are:
- Basic Home Mortgage — The traditional expected FHA loan, which can be used for a one to four-unit principal property
- FHA Energy Efficient Mortgage — A mortgage for home buyers or refinancers who want to invest in energy-efficient home upgrades, limited by the amount of energy-efficient upgrades you can make
- FHA Rehab Mortgage — A mortgage offered to homeowners who plan to purchase a home in need of repairs, with a cost of at least $5,000
- Mortgage Insurance for Disaster Victims — A loan without down payments offered to people who lost their homes in a natural disaster, which is intended to help them purchase a new home or repair the damage to their own home
- Good Neighbor Next Door — An option for certain professionals, such as teachers, firefighters, and medical professionals, which allows them to purchase certain eligible properties for 50% off, provided they work in the required fields and have been doing so for at least a year
Each of these options has benefits and qualification specifications, so it is a great idea to explore your options. Some FHA loans can actually be used multiple times, provided you meet the right criteria. If you’ve sold a prior home and haven’t owned a home for three or more years, you’d qualify as a first-time homebuyer and be eligible for an FHA loan.
What are the Requirements for an FHA Loan?
In order to get an FHA loan, you need to meet certain criteria. Firstly, the home you want to buy needs to be inspected to ensure it meets minimum housing standards and appraised by an FHA-approved appraiser. Additionally, this cannot be a second home or a property used exclusively for investment purposes. As a purchaser, you need to have a minimum credit score of 580 to make a 3.5% down payment, with allowances for lower scores if you can make a higher down payment. You will also need to show a reliable employment history for at least two years.
FHA loan limits also vary depending on the area. They are limited to $541,287 in most areas, assuming the property is a single unit. However, in metropolitan areas, the limit climbs to $1,249,125, and multi-unit properties may have allowances that are on the higher end of this range. Your rough borrowing amount can be calculated using this guide from the U.S. Department of Housing and Urban Development website.
Learn more: How to Buy Your First Rental Property
Should I Use an FHA Loan as a Landlord?
If you are a first-time home buyer, hoping to become a landlord, using an FHA loan may be an excellent option. These home loans can be highly valuable, especially for young people or low-income families, who may struggle to afford a house in today’s competitive market. Not everyone qualifies for an FHA loan, meaning that it isn’t an ideal solution for current landlords who wouldn’t be living at the property they are buying and who already have a few properties in their portfolio.
However, for first-time homeowners who haven’t yet become landlords but hope to do so on a small scale, an FHA loan is an excellent solution. A trusted broker may be able to guide you regarding the ins and outs of FHA loans, or you can contact the FHA Resource Center with any questions. These solutions can be highly valuable, but are not available to everyone.
Final Thoughts
Buying your first property is an exciting time in anyone’s life, and it is a great step to invest in your future, whether you want to become a landlord or not. If you want to become a housing provider, FHA loans for landlords are a great way to purchase a first property. If you are new to home ownership and want to become a landlord either in the near future or distant future, consider your FHA loan options.