I recently had a conversation with a client who has lived in a home for 12 years with a FHA loan and they wanted to rent it out when they bought another home. They had heard that they would have to refinance to a conventional loan or pay off the FHA loan before they could use it as rental property. The bottom line was…
If my home has a FHA loan… Can I use it as a rental property?
The Answer is a Definite MAYBE!
It depends on why you are moving out of the home and if you want to use a FHA loan to buy your new home. FHA loans are generally intended for owner occupants. The agency prohibits investors from taking advantage of the government insurance program to build investment portfolios. The FHA does allows a borrower to eventually rent out his property if he does not break certain outlined rules.
What is a FHA Loan?
A FHA loan is a loan insured against default by the FHA. In other words, the FHA guarantees that a lender won’t have to write off a loan if the borrower defaults – the FHA will pay. Because of this guarantee, lenders are willing to make large mortgage loans.
The loans require a minimum down payment of 3.5 percent and offer flexible qualifying guidelines when compared to conventional financing. FHA loans are generally for principle residences, must be occupied by the borrower within 60 days of closing with continued occupancy for at least one year.
To prevent circumvention of the restrictions on making FHA insured loans to investors, the FHA will GENERALLY not insure more than one principle residence mortgage for any borrower.
Exceptions
RELOCATION – A borrower may be eligible to obtain another FHA insured mortgage without being required to sell an existing FHA covered property is the borrower is relocating (for any reason) outside of a reasonable commuting distance from his/her current principle residence. If the borrower again relocates back to the area of the FHA covered property they are NOT required to reestablish primary residency in that property to be eligible for another FHA insured mortgage.
INCREASE IN FAMILY SIZE – A borrower may be eligible for another home with an FHA insured mortgage is the number of his/her legal dependents increases to the point that the present home no longer meets the needs of the family. The borrower must provide sufficient justification to indicate the home does not meet the needs of the larger family and that the Loan-to-Value (LTV) ratio equals 75% or less based on the outstanding mortgage balance and a current appraisal.
VACATING A JOINTLY OWNED PROPERTY – A borrower may be eligible for another FHA insured mortgage if he/she is vacating a residence that will remain occupied by a co-borrower. (ie…Divorce)
NON-OCCUPYING CO-BORROWER – A borrower may be qualified for a FHA insured mortgage on his/her principle residence even if he/she is a non-occupying co-borrower with a joint interest in a property being purchased by other family members as their principle residence with a FHA insured mortgage.
Intention of the Regulations
Under no circumstances may investors use the exceptions described to circumvent the FHA ban on loans to private investors and acquire rental properties through purportedly purchasing “principal residences.”
For More Information
HUD: Handbook 4155.1: Chapter 4, Section B: Eligibility Requirements for Principal Residences
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