If you want to buy a house not to live in but to use as an investment property -- renting it out to tenants as a way to earn extra money each month -- you'll need to be careful about the type of mortgage loan you take out to finance it. Certain loans -- mostly those insured by a branch of the federal government -- require that you live in your home. This includes loans insured by the U.S. Department of Housing and Urban Development's Federal Housing Administration.
Loans insured by the Federal Housing Administration -- better known as FHA loans -- are popular among buyers because they come with lower down payment requirements. If your FICO credit score is at least 580, you'll only need a down payment of 3.5 percent of your home's final purchase price when taking out an FHA-backed loan. But these loans also come with their own set of restrictions. One of these is the occupancy restriction. The government requires that borrowers taking out FHA loans actually live in the properties that they are buying.
Don't be tempted to lie about living in your home. As you fill out your lender's Uniform Residential Loan Application, you must specify whether you plan to occupy the home you are buying as a primary residence. If you lie so that you can qualify for an FHA loan, you are committing mortgage fraud. Lenders, if they find out, will react in different ways. Some might ignore the fraud. Others, though, might increase your interest rate; lenders view investment buyers as being more likely to walk away from their loan payments if they should sustain a financial hardship. Because of this, buyers usually pay higher interest rates when buying investment properties as a way to provide financial protection to their lenders. Technically, a lender could take the more extreme step of foreclosing on your loan. Lenders can do this because you will have violated the terms of your mortgage agreement.
The FHA has several rules that help determine whether borrowers are using a home as a primary residence. First, owners must move into their home within 60 days of closing an FHA-insured loan. Borrowers must live in the home for the majority of the calendar year. At least one of the borrowers must live in the home for at least one year.
If you want to purchase a home that you can then rent out, your better choice is to apply for a conventional mortgage loan. Be aware, though, that you will probably have to come up with a larger down payment -- usually at least 10 percent of your home's purchase price -- and pay a higher interest rate. Lenders enact these measures because they view investment buyers as riskier. They are not tied emotionally to their homes because they are not living in them, and, the reasoning goes, are more likely to default on their mortgage payments should they suffer financial setbacks.
- U.S. Department of Housing and Urban Development: Property Ownership Requirements and Restrictions
- HSH: Occupancy Fraud: Risks Not Worth the Rewards
- Federal Deposit Insurance Corporation. "203(b) Mortgage Insurance Program," Page 23. Accessed Oct. 30, 2020.
- Rocket Mortgage. "What Is an FHA Mortgage Insurance Premium?" Accessed Oct. 30, 2020.
- Consumer Financial Protection Bureau. "FHA Loans." Accessed Oct. 30, 2020.
- U.S. Department of Housing and Urban Development. "Section B. Acceptable Sources of Borrower Funds," Pages 10-17. Accessed Oct. 30, 2020.
- Rocket Mortgage. "What Are Seller Concessions?" Accessed Oct. 30, 2020.
- GovLoans.gov. "Basic FHA Insured Home Mortgage." Accessed Oct. 30, 2020.
- Federal Deposit Insurance Corporation. "FDIC Law, Regulations, Related Acts." Accessed Oct. 30, 2020.
- Office of the Minnesota Attorney General. "Home Buyer's Handbook," Page 27. Accessed Oct. 30, 2020.
- Assurance Financial. "What You Need to Know About FHA Loans." Accessed Oct. 30, 2020.
- U.S. Department of Housing and Urban Development. "203(k) Rehab Mortgage Insurance." Accessed Oct. 30, 2020.
- U.S. Department of Housing and Urban Development. "HUD 4155.1, Mortgage Credit Analysis for Mortgage Insurance, Section B. Documentation Requirements," Pages 9-17. Accessed Oct. 30, 2020.
- U.S. Department of Housing and Urban Development. "The FHA Single-Family Insurance Program: Performing a Needed Role in the Housing Finance Market," Page 7. Accessed Aug. 11, 2020.
- Experian. "What Is an Ideal Debt-to-Income Ratio?" Accessed Oct. 30, 2020.
- Ellie Mae. "September Ellie Mae Origination Insight Report Data Shows Interest Rates Drop to New Historic Lows; Refinances Continue to Gain Traction." Accessed Oct. 30. 2020.
- Rocket Mortgage. "Conventional Mortgages: Everything You Need To Know." Accessed Oct. 30, 2020.
- U.S. Department of Housing and Urban Development. "The Federal Housing Administration (FHA)." Accessed Oct. 29, 2020.
- Freddie Mac. "Why Are the Experts Pessimistic About the Future of Homeownership?" Accessed Oct. 29, 2020.
Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.