FHA loans are meant for owner occupied properties only. The FHA makes this very clear in their loan documents. You sign a document stating you intend to occupy the property. Unfortunately, we can’t all tell the future. What happens if you want to rent out the home you bought with FHA financing? Is there any chance?
Luckily, there is, but you have to follow certain rules. It’s a fine line you walk when trying to get around the FHA guidelines. We discuss the parameters below.
Initially, when you close on an FHA loan, you must state that you will occupy the property within 60 days. You must also state that you will live in the property for at least 12 months. If the borrower can’t live in the property for that time period, a co-borrower can satisfy the requirements. As long as someone on the loan occupies the property full-time for the first year, the requirement is met.
How to Rent Out Your Home With an FHA Loan
After that first year, technically, you are still supposed to live in the property. If not, you should sell it and pay off your FHA loan. The FHA only creates loans for low to middle-income borrowers looking for a primary residence.
But, there’s an exception. If you must relocate to somewhere further away, you may be able to rent out your home. The reason for relocation can be job related or due to an increasing family size where the home doesn’t meet your needs any longer.
If you meet one of the above exceptions, you may be able to secure another FHA loan for the next home you buy. You may not have to sell your current home. However, this is only upon HUD approval. Don’t assume you can get a second FHA loan without getting approval first. HUD must determine if your reason is acceptable first.
If your reason is acceptable, you may rent out your current home. You also will not be required to move back to the home at any point, even if you move back to the area.
The Price you Pay
If the FHA allows you to rent out your current property, you’ll pay a price, so to speak, on your next FHA loan. Chances are, if you had a credit score above 580, you only put 3.5% down on the home. However, before HUD allows you to move out of this home and buy another, you may have to lower the balance of your loan.
In other words, you may have to pay a significant amount towards the loan amount. Typically, HUD requires that your loan balance be no more than 75% of the home’s value. Luckily, if your home appreciated, HUD may accept a new appraisal. This would lower the amount you’d have to pay to lower the balance to an acceptable LTV.
Getting Around the FHA Rule
However, there is one way you can get around the FHA rule and rent out your home. This only pertains to multi-unit properties. FHA loans allow you to purchase 1 to 4 unit properties. Let’s say you bought a 3-unit property with FHA financing. You’d have to live in one unit as your primary residence. However, you would have the remaining two properties which you could lease out. This gives you the chance to be an investor while satisfying the FHA’s owner occupancy rules.
Qualifying for an FHA Loan
Now that you know how you can use an FHA loan to rent out a property, you should know how to qualify for it. This is not just a first-time homebuyer’s loan. Anyone that meets the qualifications can obtain the loan.
- At least a 580 credit score
- A front-end ratio that does not exceed 31%
- A back-end ratio that does not exceed 43%
- Comparable rent payments with a timely history
- Steady income
- An FHA approved property
- 5% of the purchase price for a down payment
The FHA offers flexible guidelines that make it easy for many people to qualify for the loan.
Paying the FHA Premium
Something to keep in mind, though, is the premium you will pay for the FHA loan. They charge an upfront mortgage insurance fee as well as an annual fee.
You pay the upfront fee at the closing. In some cases, you can wrap it into your loan. It equals 1.75% of your loan amount. On a $200,000 loan, this means $3,500. This is not money you get back if you sell the home or even pay off the FHA loan.
In addition, the FHA charges annual mortgage insurance. Right now, it equals 0.85% of your outstanding loan amount. The FHA calculates the amount every year based on your average outstanding balance. In the above example, you would pay $141.67 per month:
$200,000 x 0.85% = $1,700
$1,700/12 months = $141.67 per month
The amount decreases slightly every year assuming you pay your mortgage payments on time.
Technically, the FHA loan is only for owner occupied properties. However, there are ways around it. With approval, you may be able to rent out your home or buy a multi-unit and collect rent on the unoccupied units.
Make sure you get approval before doing anything outside of what you agreed to when you signed your mortgage papers. The FHA takes mortgage fraud very seriously. With the right approval, however, you can make the most out of your FHA loan and getting the home you need.