What are the FHA home loan rules for buying investment properties? Regular readers of this blog may be confused by this question since our posts emphasize time and again that FHA single family home loans are for owner/occupiers and not for investment properties.
So how can the FHA loan Handbook, HUD 4000.1, have rules that govern the purchase of an investment property with an FHA mortgage?
The answer is actually fairly simple; FHA loan rules make an exception in certain cases. The FHA home loan policy in this area is explained on page 142 of HUD 4000.1, starting with a definition of the term “investment property”.
According to the FHA, “An Investment Property refers to a Property that is not occupied by the Borrower as a Principal or Secondary Residence”.
HUD 4000.1 goes on to say, “Investment Properties are not eligible for FHA insurance” but then outlines an exception, stating:
“Investment Properties are eligible if the borrower is a HUD-approved Nonprofit Borrower, or a state and local government agency, or an Instrumentality of Government.”
Investment Properties are eligible for insurance under the HUD Real Estate Owned program that allows the purchase of homes with FHA home loans that have gone into foreclosure.
This is allowed for approved FHA borrowers except those applying for an FHA 203(k) rehab loan.
What is specifically defined a HUD Real Estate Owned (REO) home? HUD 4000.1 states, “A HUD Real Estate Owned (REO) Property, also known as a HUD Home or a HUD- owned home, refers to a one- to four-unit residential Property acquired by HUD as a result of a foreclosure or other means of acquisition on an FHA-insured Mortgage”.
The foreclosure (or other means) creates a situation where “the Secretary of HUD becomes the property owner and offers it for sale to recover the mortgage insurance claim that HUD paid to the Mortgagee.”
In general, FHA loans are intended for owner-occupiers purchasing primary residences or FHA-approved secondary residences under limited circumstances. Private citizens (except as described above) are not allowed to use FHA mortgage loans to buy property they don’t intend to live in as their main address.
Ask your lender if you aren’t sure how these rules apply to your home loan transaction.