November 21, 2017
What are the FHA loan rules for occupancy? This is a question many borrowers are curious about, especially those who are interested in becoming landlords and earning rental income from their property. Does the FHA single family home loan program allow a borrower to rent out the property purchased with an FHA mortgage?
FHA Loans Are Specifically For Owner/Occupiers
HUD 4000.1, the FHA loan handbook, states clearly that at least one person obligated on the FHA mortgage is required to use the property as their primary residence:
“At least one Borrower must occupy the Property within 60 Days of signing the security instrument and intend to continue occupancy for at least one year.”
Furthermore, the FHA clearly defines what it considers to be a “principal residence”. On page 140 of HUD 4000.1, we learn:
“A Principal Residence refers to a dwelling where the Borrower maintains or will maintain their permanent place of abode, and which the Borrower typically occupies or will occupy for the majority of the calendar year. A person may have only one Principal Residence at any one time.”
Note the final line in that quote-only one principal residence is allowed at a time.
FHA Loan Rules For Occupancy: Multi-Unit Properties
The FHA loan program allows a borrower to purchase a residence with as many as four living units. This means that as long as the borrower occupies at least one of those units as the primary residence, she may rent out the other unused units to others without being in violation of the FHA loan agreement.
Some want to know if they may use projected rental income to qualify for the FHA home loan and have that income included in the borrower’s debt-to-income ratio. This issue is handled on a case-by-case basis and those interested will need to work with the loan officer to see what may be possible. State law and lender standards will apply.
Multiple FHA Loans?
A borrower may get the idea to purchase a second property with the purpose of renting it out. But FHA loan occupancy rules above would prohibit this. That does not mean the borrower cannot have two mortgage loans (one FHA, one non-FHA), but the FHA mortgage requires occupancy.
FHA loans are designed specifically to prevent the FHA single family loan program from being used to buy investment properties. From HUD 4000.1, page 140:
“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.”
There are certain exceptions to the “one borrower,one FHA loan” rule. Most of them require qualifying circumstances like a change in family size or a job relocation. Lender standards will also apply.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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