Admittedly, the title, “FHA Loan Rules For Investment Properties” might sound a little misleading; the FHA lender’s handbook HUD 4000.1 states clearly on page 142, “Investment Properties are not eligible for FHA insurance.”
But what is the FHA definition of an investment property?
The answer to that question is twofold-to understand what constitutes an investment property, we have to examine what is NOT an investment. What is the type of home loan the FHA does guarantee?
FHA mortgages are primarily for owner-occupiers. At least one borrower obligated on the mortgage must live in the home as her permanent, principal residence within a reasonable time after the loan closes.
In some cases, FHA loan rules make provisions for borrowers who want to use an FHA loan for a secondary residence, but the borrower is required to meet certain requirements in order to do so.
The FHA definition of an investment property is simple. According to HUD 4000.1, “An Investment Property refers to a Property that is not occupied by the Borrower as a Principal or Secondary Residence.”
So regardless of whether you are buying a fixer-upper home with an FHA 203(k) rehab loan, an existing construction property, or having a home built from the ground up with an FHA One Time Close construction loan, the occupancy requirement is paramount.
FHA loan rules do make an exception, however, in certain instances. According to page 142, we learn:
“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.”
The next line in this portion of the FHA loan rules adds, “Investment Properties are eligible for insurance under the HUD Real Estate Owned (REO) Purchasing product, except under the 203(k) program.” Note that the 203(k) rehab loan program is excluded. Additional lender requirements, state law, and other restrictions may apply.
In addition to the occupancy requirement, there is also a geographic consideration for FHA mortgages. They can only be approved for properties that are within the United States as described on page 143:
“The Property must be located within the U.S., Puerto Rico, Guam, the Virgin Islands, the Commonwealth of the Northern Mariana Islands, or American Samoa.”
Speak to a loan officer if you are unsure how these requirements apply to your transaction.