Federal Housing Administration (FHA) loans were created to promote homeownership. These loans have lower down payment requirements and more liberal underwriting standards than most conventional mortgages. Because of their stated purpose, FHA loans are, for the most part, restricted to buyers who intend to occupy the houses they are purchasing. An FHA loan typically cannot be used to finance a second home, a rental home, a vacation home or investment property. However, there are a few exceptions to the general rule.
Suppose a person buys a home as his primary residence and uses an FHA loan to finance the purchase. Down the road, he moves out of the home but continues to own it and rents it out for income. In other words, the house becomes an investment property. Interest rates drop, and the owner wants to refinance for a better deal.
Even though he no longer lives in the house, FHA rules allow him to refinance into another FHA loan. An FHA-to-FHA refinance is also known as an FHA streamline refinance.
There are several requirements to qualify:
If you meet the above, FHA streamline refinances are quite possibly the easiest loans to close. They require no employment or income verification, no credit score verification, and no home appraisal. The main thing that matters is that the homeowner has made his existing FHA loan payments on time.
Another way to use an FHA loan to buy an income property is to purchase a duplex, or some other sort of residence with distinct units. The owner lives in one unit, making it an owner-occupied property and thus FHA-eligible, and he rents out the other unit for income. A savvy investor in a hot rental market sometimes earns enough income using this method to live in the home for free. FHA lends up to 96.5% of the appraised duplex value, meaning the purchaser can put as little as 3.5% down.