While there are some exceptions described in the FHA loan rulebook, FHA loans for single-family homes are limited to what the FHA describes as “owner-occupied principal residences only”. The FHA describes “principal residences” as a property that “will be occupied by the borrower for the majority of the calendar year”.
We’ve covered this topic elsewhere in previous posts; what we’re discussing today is situations where the borrower may perceive a gray area in the rules–what situations are considered purchases for investment purposes versus single-family home loans as described above?
In general, any loan where the following applies to the borrower may be considered a non-investment type purchase: “FHA security instruments require a borrower to establish bona fide occupancy in a home as the borrower’s principal residence within 60 days of signing the security instrument, with continued occupancy for at least one year.”
In addition, the rules state “…to prevent circumvention of the restrictions on making FHA-insured mortgages to investors, FHA generally will not insure more than one principal residence mortgage for any borrower. FHA will not insure a mortgage if it is determined that the transaction was designed to use FHA mortgage insurance as a vehicle for obtaining investment properties, even if the property to be insured will be the only one owned using FHA mortgage insurance. Any person individually or jointly owning a home covered by an FHA-insured mortgage in which ownership is maintained may not purchase another principal residence with FHA insurance, except in certain situations…”
One example of the exception? According to FHA loan rules in HUD 4155.1 Chapter Four Section B, “A borrower may be eligible to obtain another FHA-insured mortgage without being required to sell an existing property covered by an FHA-insured mortgage if the borrower is
–establishing residency in an area outside reasonable commuting distance from his/her current principal residence.”
FHA loans that are considered investment purchases are described by the FHA as, “a property that is not occupied by the borrower as a principal or secondary residence.” FHA loan rules do permit loans for investment purposes under the following circumstances described in HUD 4155.1 Chapter Four: “With permission from the appropriate Homeownership Center (HOC), private investors, including nonprofit organizations that do not meet the criteria described in HUD 4155.1 4.A.6.a, may obtain FHA-insured mortgages when
–purchasing HUD Real Estate Owned (REO) properties, or
–obtaining a streamline refinance without an appraisal.
Note: In HUD REO transactions, owner occupancy is not required when the jurisdictional HOC sells the property and permits the purchaser to obtain FHA-insured financing on the investment property.” There are separate rules for FHA loans made on investment properties. Borrowers should know that anyone applying for an FHA loan on a single family home (as opposed to an investment property) is subject to different criteria and regulation of the loan than for investment properties.
FHA loan rules say, “For investment properties, FHA will not insure loans made solely in the name of a business entity (such as a corporation, partnership, or sole proprietorship), except for streamline refinances where the mortgage was originally insured in the name of a business. Additionally, FHA requires that one or more individuals, along with the business entity or trust, must be analyzed for creditworthiness
–the individual(s) and the business entity or trust must appear on the mortgage note, and
–if all parties appear on the property deed or title, they must also appear on the security instrument.”
Finally, one of the major differences between FHA loans for primary residences (single family homes) and investment properties is the amount of money available to borrow. According to FHA.gov, investment property loans are different; “Base mortgage calculation is 75% LTV, based on the lesser of the appraised value or the sales price” of the investment property.
Do you have questions about FHA loans? Ask us in the comments section.