Real Talk About FHA Loans and Investment Properties
What are an FHA borrower’s options when it comes to becoming a landlord in a multi-unit home purchased with an FHA mortgage?
FHA Home Loan Rulesfor Investment Properties
Some FHA loan applicants get discouraged when they learn that the FHA Loan Handbook, HUD 4000.1, states clearly that a borrower cannot use an FHA single-family mortgage to purchase an investment property. But that does NOT mean that FHA borrowers have no options to make money on the home they purchase.
While it is true that FHA Single-Family Mortgages are intended for owner-occupiers and that at least one borrower obligated on the mortgage must use the home as her home address, FHA loans are possible for properties with as many as four units.
Lender requirements for multi-unit properties will apply for such transactions, but FHA loan rules permit the lender to approve an FHA mortgage or refinance loan for 1-4 unit homes.
Those rules also permit the borrower to occupy a single unit and rent out the unused units in the home.
FHA Loan Rules fFor 1-4 Unit Properties and Rental Income
Lender standards may or may not permit a borrower to use potential rental income from the property secured with the FHA loan to count towards qualifying income for the loan, but FHA loan rules themselves do permit this under the right circumstances.
The borrower must be able to document experience as a landlord and provide that documentation to show how the income would be stable, reliable, and likely to continue.
This income is known as Net Self-Sufficiency Rental Income, and HUD 4000.1 instructs the lender:
“Net Self-Sufficiency Rental Income is calculated by using the Appraiser’s estimate of fair market rent from all units, including the unit the Borrower chooses for occupancy, and subtracting the greater of the Appraiser’s estimate for vacancies and maintenance, or 25 percent of the fair market rent.”
Again, it will be up to the lender and the standards of your chosen financial institution as to whether this income may be counted toward your debt-to-income ratio. Ask your loan officer about the requirements for doing so.
Federal Fair Housing regulations, state law, lender requirements, and other rules may apply.
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