The government insures mortgages for borrowers who lack sufficient down payment funds or otherwise have trouble qualifying for conventional financing. The Federal Housing Administration protects private lenders' interests by reimbursing their losses if you fail to repay a home loan. You can obtain an FHA-backed loan with a 3.5-percent down payment and flexible terms. You can own investment property and get an FHA loan for a home you plan to live in.
A First-Time Buyer Favorite
Although many first-time buyers opt for FHA loans due to the relative accessibility and affordability, borrowers who previously and currently own homes also benefit from the program. You can own other real estate, such as a second home or vacation homes and rental properties. Investment property owners must prove that they intend to live in the new home for a majority of the calendar year. To establish owner occupancy, at least one borrower on the FHA loan must move into the principal residence within 60 days of signing the mortgage agreement.
Bona Fide Owner Occupants Only
FHA generally prohibits borrowers from using its mortgage insurance programs to buy investment properties. A mortgage underwriter also can use discretion to determine whether the lender can reasonably expect a borrower with investment properties to use the new home as a bona fide principal residence. Under certain circumstances and with restrictions, an investor entity, such as a nonprofit organization, can buy a property with an FHA-insured loan.
Looking at the Bigger Picture
Lenders scrutinize information about your investment property to ensure that you do not use the FHA loan to build your investment portfolio. This entails analyzing information on the loan application regarding other real estate you own, checking the current rental status of properties you rent out, and evaluating the rental income, losses and deductions you reported on your taxes for the past two years. Lenders may request current rental agreements and mortgage documents for loans on your investment properties. Underwriters check the occupancy status used to obtain financing on recent purchases, and the amounts you pay for the property each month.
Using Rental Income to Qualify
An investment property can help you gain FHA financing when you use net rental income to qualify. The lender multiplies the gross rent you charge by a vacancy factor -- usually 25 percent -- to account for potential vacancy and repairs. It then subtracts the total monthly housing payment, including principal, interest, taxes and insurance, from this figure. If the calculation yields a positive, or net, figure, the lender can add the net rental income to your other gross monthly income.
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.