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.
Refinancing an Existing FHA Loan
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:
- A minimum of 210 days must have passed since you closed your original home loan.
- You must have made at least six monthly payments on your FHA-issued mortgage.
- If you have only had your FHA loan for less than a year, you cannot have any payments overdue by more than 30 days. If you have held your FHA loan for more than a year, you are allowed a single 30-day late payment within 12 months, but that late payment cannot have been within the last 90 days.
- The refinance must lower your monthly principal and interest payments, which is often described as a net tangible benefit. For example, if your previous monthly payment was $1,100, your new monthly payment after the refinance should be $1,050 or lower. Refinancing into a mortgage with a shorter term also qualifies a net tangible benefit.
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.