Using FHA Loans to Buy Investment Property
The FHA loan takes advantage of a program where the Federal Housing Administration will insure certain mortgages if they meet certain requirements, allowing lenders to work with lower credit borrowers who might be looking at making smaller down payments. This means if a borrower applies for this type of loan and down the road stops making payments, the FHA will step in and pay the lender back.
It's a great program for many reasons. Buy a property for 3.5% down and you only need a credit score of 580.
But there's one major drawback that affects real estate investors.
This has to be an owner-occupied property, so you have to live in it for at least a year.
Can You Buy Investment Property With an FHA Loan?
When you buy a property with an FHA loan you have to live there, but that doesn't mean you can't buy an investment property.
In fact, it's quite encouraged as you can buy a duplex, triplex, or fourplex with an FHA loan and rent out the remaining units.
You could even house hack a single-family home and rent out the other rooms you don't use.
And lastly, even though the property has to be your primary residence you can move out after a year, converting it to an investment property.
So yes, you absolutely can buy investment property with an FHA loan.
About that Mortgage Insurance...
Of the many requirements of the FHA loan is the lifelong mortgage insurance that comes with it.
That's right. The FHA requires mortgage insurance and unlike other conventional mortgages, it doesn't go away once you build enough equity.
For example, I bought my first property with a 5% down payment so I was on the hook for mortgage insurance. However, after the first year, I renovated the property and increased the value to the point where I had enough equity to cancel it. But with an FHA loan, you can never cancel your mortgage insurance.
The only way out is to refinance your FHA loan into a different type of loan that doesn't require mortgage insurance. This is what investors will usually do.
Property Condition Requirements
Since the FHA is insuring your loan, they put extra effort into making sure the asset backing it up meets certain requirements.
Beyond your normal appraisal that determines the value of the home, the general condition of the property will be closely assessed.
Additionally, if you are looking at condos the FHA has a special requirement for you. Not only does the condition of the unit have to meet their requirements, but the building itself has to be approved by the FHA as well.
Any significant repairs, hazards, or liabilities can prevent the property from meeting FHA standards and prevent you from getting your loan.
These requirements tend to affect investors because we often look for property that we can fix or improve the value of. You generally won't get the best returns on new construction or turn-key property because there's no more value for you to add. You can't force appreciation or build additional equity through renovations.
Keep in mind your goals as an investor and whether or not an FHA loan will allow you to buy property that meets your investment goals.
FHA Loans and Offer Strength
At the time of writing this, it is a very competitive market for buyers.
It feels like more offers are getting beaten by cash offers with no contingencies. Yikes.
So you do need to consider how relying on an FHA loan may affect your ability to write a strong competing offer with these types of buyers.
In general, an offer that depends on an FHA loan will be deemed weaker than a cash offer because there is a higher likelihood that your loan isn't approved and you fall out of escrow. A cash offer with no contingencies is much more reliable since they don't need the approval of any lender or government agency.
Keep this in mind if you decide to use an FHA loan to buy investment property, as this might mean you have to beat competing buyers in price or with other means. You'll likely need to be creative and work with your real estate agent to write a strong offer that makes sense for you.