Can You Use an FHA Loan for Investment Property? Learn How & Explore Options

Real estate investors often run into one major challenge early on: securing the right financing. With FHA loans’ attractive terms, many have wondered whether they can be used for investment properties. While they are specifically designed for primary residences, can you use an FHA loan for investment property? 

Technically, the answer is no, however, there are workarounds you can use. Keep in mind that there might be better options for you to explore before you go all-in on using an FHA loan for an investment property, as there are restrictions that limit the use of an FHA loan for investment properties. Think loan options for investment properties like DSCR loans, which we will discuss more below.

At Defy Mortgage, we specialize in creative financing solutions primarily for real estate investors looking to purchase or refinance investment properties. We can help you explore your options for FHA loans for investment properties and assist you in understanding more creative, alternative financing options under the non-QM loan umbrella that might be a better fit for your investment objectives.

In this guide, we’ll explore: 

• How to legally use FHA financing for investment purposes.
• Proven creative financing methods using FHA loans. 
• Caveats to watch out for. 
• Alternative loan options for investment properties. 

TL;DR 

• FHA loans are designed for owner-occupied primary residences, not investment properties. However, there are legal ways to turn an FHA-purchased property into an investment property. Explore other options available such as DSCR loans before you decide on an FHA loan for an investment property.
• FHA loans are appealing because of their low 3.5% down payment and lenient credit requirements, making them a potential entry point for investors who don’t qualify conventionally.
• However, it also has its drawbacks, including mandatory mortgage insurance premiums, FHA property standards, and limited eligible property types.
• The primary requirement is to fulfill the FHA’s occupancy requirement: Move in within 60 days of closing and use the property as your primary home for at least 12 months.
• While they can be useful, FHA loans aren’t ideal for scaling a portfolio. For real investors, non-QM options like DSCR, bank statement, P&L, and asset-depletion loans offer more flexibility and are designed for investment use from day one.

What Is an FHA Loan?

An FHA loan is a mortgage backed by the Federal Housing Administration (FHA). This gives it more lenient credit score requirements and low down payments. However, some restrictions limit the use of an FHA loan for investment property. 

The primary goal of FHA loans is to help individuals achieve homeownership by providing affordable financing for owner-occupied properties. These loans were not designed for real estate investors looking to expand their portfolio, but rather to assist buyers in purchasing their primary residence. Due to their lower down payment requirements and more lenient credit score thresholds, FHA loans frequently appeal to first-time homebuyers.

However, there are ways to use properties secured with FHA financing as investments. Again, the key point is “time.” These methods typically require working within the restrictions placed on FHA loans to discourage real estate investors from exploiting them.

Key Restrictions on FHA Loans

FHA loans come with several restrictions, with the most relevant ones to real estate investment being:

• The property must serve as your primary residence for at least one year. Borrowers are required to certify occupancy, ensuring compliance with federal guidelines.
• Primary residents must meet the livability standards and move in within 60 days of closing.
• FHA loans cannot be used to purchase purely investment properties. This means that commercial properties, mixed-use properties, short-term rentals, and vacation homes are not eligible.

Failure to adhere to these rules can lead to significant penalties, such as loan denial and legal consequences.

Can You Use an FHA Loan for an Investment Property?

Although FHA loans were primarily designed to give Americans an easier pathway to achieving homeownership, there are ways you can use them to obtain an investment property, while still staying within the FHA’s guidelines. However, we would advise getting an investment property loan for an investment property, such as a DSCR loan. In any case, these are:

Flipping the Home After the One-Year Residency Period

Under standard FHA rules, you must certify that the property will be your primary residence and be fully moved in within 60 days of closing. But once you’ve lived in the property for a total of 12 months, you can choose to sell the home (i.e. “flip” it), cashing in on any home appreciation since you purchased it. 

The effect of this can be maximized by finding an undervalued home in need of repairs (what’s known as a “fixer-upper”). By investing in the necessary updates, you could potentially sell the property at a much higher price, taking advantage of the increased market value. 

Refinancing an FHA Loan for Investment Use

With refinancing, you don’t have to wait a full 365 days to start generating income with an FHA-financed property. According to FHA guidelines, once you’ve lived in the home for at least 210 days and have made six on-time monthly payments, you will be allowed to refinance. This includes refinancing into a conventional loan, which would free you from the FHA property obligations and allow you to turn the property into a rental or a long-term hold.

Aside from these two, you can also employ a “house hacking” strategy. “House hacking” refers to the act of using your home to generate income while you use it as your residence, and FHA loans are often suited for this purpose.

House Hacking with FHA Loans

Using an FHA loan, you can purchase a primary residence while generating rental income from spare rooms or additional units. Keep in mind though, that restrictions may apply, given your lender of choice and the location of the home. This approach can help offset mortgage payments and build equity. There are a number of “house hacking” strategies that can help offset the costs of home ownership:

Split the Home With Housemates

Sharing your home with housemates is one of the simplest ways to offset costs. By renting out a portion of your home, you can collect rent while splitting utilities and maintenance expenses.

While sharing your living space may compromise some of your privacy, the financial benefits can outweigh the disadvantages. If you decide to go this route, you should carefully vet potential housemates to find someone who aligns with your lifestyle.

Rent Out Units in Multi-Family Properties

One popular exception to the rule that you cannot use an FHA-financed property purely as an investment is to purchase a multi-family property and live in one of the units. FHA loans allow borrowers to buy properties with up to four units and rent them out, provided they occupy one of the units as their primary residence. This setup essentially works like splitting a home with housemates, without compromising privacy.

However, keep in mind that the FHA accounts for your self-sufficiency test. This test evaluates whether the rental income from the other units in a multi-family property is sufficient to cover the mortgage payment, including principal, interest, taxes, and insurance (PITI). For properties with three or four units, the projected rental income must equal or exceed the monthly mortgage payment. To ensure accuracy, lenders typically use 75% of the projected rental income to account for potential vacancies or maintenance costs.

Rent Out Additional Space

If present on your property, a basement apartment, detached garage, guesthouse, or even a spare room can generate additional rental income. Before diving in, be sure to check your local short-term rental regulations and homeowners association (HOA) rules, as some HOAs prohibit both short- and long-term rentals outright.

If permitted, short-term rentals are a more flexible way to explore space sharing as an additional revenue stream. Platforms like Airbnb and Vrbo allow you to rent out spare rooms, offering a taste of the landlord experience without the commitment of long-term tenants. Women property owners may prefer Golightly, a platform that caters exclusively to women and vets all guests and hosts for added safety.

Extra outdoor space can also be monetized, whether by renting out storage areas, parking for RVs, or even living in an RV yourself while leasing the main home.

If you don’t have any space readily available, you can also rent out accessory dwelling units (ADUs), or self-contained living spaces like a converted garage or detached guesthouse.

Risks and Consequences of Misusing FHA Loans

While it’s possible to take advantage of FHA loans within legal boundaries, it’s important to note that failure to adhere to any of the guidelines will result in legal consequences. There can also be financial drawbacks to using FHA loans to finance an income-generating property, as well as far-reaching ethical repercussions for overusing FHA loans to build a real estate investment portfolio.

Potential Legal Issues

Using an FHA loan for investment purposes without adhering to the program’s guidelines is considered loan fraud—a serious offense. The consequences of such actions may include:

• Legal Penalties: Failing to work within the restrictions of FHA mortgages may result in severe penalties, up to and including imprisonment. With minor infractions, you may face substantial fines, which can escalate quickly and drain your financial resources.
• Immediate Loan Repayment: Borrowers caught misusing FHA funds may be required to repay the remaining loan balance in full immediately.
• Foreclosure Risk: Non-compliance could also lead to immediate foreclosure if you cannot raise the funds for immediate loan repayment.

Observing the restrictions imposed by the Federal Housing Administration will allow you to avoid these legal repercussions. It’s often best to consult a lawyer before setting out to use an FHA loan for investment purposes, to ensure that you keep well within the bounds set by the FHA.

Financial Risks

Modifying an FHA-financed home to generate income can also result in financial risks:

• Increased Cost of Entry: FHA loans require mortgage insurance premiums (MIP) for the life of the loan. Even if you built substantial equity, the monthly payments on FHA mortgage insurance can erode your profits and diminish your overall returns. Additionally, FHA loans come with stringent home appraisal standards, which could necessitate costly repairs or upgrades.
• Limited Property Choices: FHA loans are primarily intended for primary residences, which limits their flexibility for investment purposes. Strict eligibility criteria, FHA loan limits, and occupancy requirements can narrow your property options, especially in a competitive market. These restrictions may force you to compromise on the property’s location, condition, or potential profitability.
• Stricter Refinancing Rules: FHA loans come with specific restrictions that may limit your ability to refinance. Even if you haven’t violated specific loan terms, individual lenders may impose additional restrictions on top of the FHA’s guidelines, which can make it much more complicated to use the property as an investment.

Ethical Considerations

Circumventing FHA rules undermines the program’s intent to support first-time homebuyers. Although working within the FHA’s restrictions is legal, you should not rely entirely on FHA loans when building your real estate portfolio. Instead, there are alternatives for real estate investors that are accessible, flexible, and customizable to meet your unique needs. Options such as DSCR loans, for example, provide real estate investors with options to use rental income to quality. No tax returns are required.

FHA vs. Investment Property Loans: Complete Comparison

Here, we’ll compare how FHA loans measure up to Defy Mortgage’s main investment property loan offerings:

Loan Type	LTV	Min credit score	Max loan amount	Eligible properties
FHA Loan	96.5%	500	County-specific Single-family: $524,225 in low-cost counties – $1,209,750 in high-cost counties 2-unit:$671,200 – $1,548,9753-unit:$811,275 – $1,872,2254-unit: $1,008,300 – $2,326,875	Single-family homesMulti-family homes (2-4 units)Mixed-use propertySecond home (if conditions apply)Manufactured homes (if affixed to a permanent foundation)Condominium (if part of an approved project)Townhouses and row houses (if part of an approved project)New construction
DSCR Loan	Up to 85% (for purchase and rate-and-term refi, single-families only)	640	$6M+	Single-familyMulti-family (2-4 units)PUDTown HomeRow HomeSite Built CondoModular HomeCondominium (Warrantable & Non-Warrantable)Co-opsCondotelsVacation homesShort-term rentals
Bank statement loan	Up to 90% (pending fico & loan amount)	640	$6M+
P&L loan	Up to 90%(pending fico & loan amount)	640	$6M+
Asset depletion loan	Up to 80%(pending fico & loan amount)	640	$6M+

DSCR Loans vs FHA Loans for Investment Properties

DSCR loans are designed for real estate investors looking to purchase or refinance an investment property. Let’s take a deeper look at FHA loans and DSCR loans when it comes to investing in real estate so you can make an informed decision on which loan option, if any, would be best for you:

Loan Feature	DSCR Loans	FHA Loans
Primary Purpose	Investment properties and rental income	Primary only (unless workaround are met but this can be risky)
Occupancy	None – property can be 100% rental	Must occupy as primary residence within 60 days and live there for at least 1 year
Income Verification	Based on property’s rental income (DSCR ratio)	Requires personal income verification, tax returns, pay stubs, employment history
Qualification Method	Property cash flow (typically DSCR ≥ 1.0, some allow 0.75+ or No ratio like Defy Mortgage)	Personal debt-to-income ratio, credit score, employment stability
Property Limits	Often unlimited – can finance extensive portfolio	Generally one FHA loan at a time (exceptions for specific circumstances)
LLC Ownership	Typically allowed	Not allowed – must be in personal name
Best For	Experienced investors, self-employed, portfolio building, pure investment properties	First-time homebuyers, house hackers (living in multi-unit), low down payment situations

Key Takeaways

Although they weren’t designed for it, savvy real estate investors can still use an FHA loan for investment property, as long as they stay within the program’s rules. After meeting the one-year occupancy requirement, strategies like flipping, refinancing into a conventional loan, or leveraging multi-unit properties through house hacking allow you to legally transition an FHA-financed home into an income-producing asset. 

However, FHA restrictions are strict, and violations can lead to penalties, forced repayment, or even legal consequences. Remember, there are dedicated investment property loans such as DSCR loans and bank statement loans, that may be better options as they are specifically for real estate investors looking to purchase or refinance investment properties. These options offer flexible FICO and down payment criteria for those who found the lower down-payment options of FHA loans appealing.

If you’re ready to go forward with your next real estate investment, Defy Mortgage is here to assist. Whether you’d like to use an FHA loan for a primary or a DSCR loan for indefinite scaling for your investment property, our Mortgage Consultants are ready to provide 24/7 guidance on your investment strategy and tailor your loans to fit. You can reach us at (615) 622-1032 or schedule an appointment on our site 

If you’re a mortgage broker, Defy TPO can give you access to all 75+ of Defy Mortgage’s mortgage products. Each of our loan options can be customized from the ground up to address each borrower’s unique needs. This unparalleled flexibility will allow you to build more resilient pipelines and work towards market dominance by targeting its most underserved sectors. Curious how that’ll work? Send us your pricing scenarios and we’ll demonstrate. 

FHA Loan For Investment Property FAQ

Can I use an FHA loan to purchase a multiunit property and live in one unit?

Yes. This is one of the most common house hacking methods, alongside renting out portions of your land. However, keep in mind that you’ll have to make that multiunit property your primary residence for at least 12 months. If the building has 3-4 units, FHA also requires the property to pass the self-sufficiency test. That means at least 75% of the property’s potential rental income must be able to cover the full PITI (Principal, interest, taxes, and insurance) payment.

What are the FHA loan occupancy requirements for multiunit properties?

The same as for any other property that you can purchase with an FHA loan: The borrower must live in one of the units for at least 12 months.  

Are there exceptions to the FHA loan’s primary residence requirement?

Yes. The main ones that concern investors are:

• If your home has become too small for your family, you can rent it out after you’ve satisfied the 1-year occupancy requirement.
• You can also rent out your first home if your job needs you to relocate to a second home. Again, you have to have lived in the home for at least a year to enable this.
• If you’re disabled or otherwise unable to work, you may be allowed to rent out individual rooms in your house to compensate for your lost wages.

Are there other loan options better suited for investment properties?

Yes, DSCR loans, and other non-FHA options are often better suited for purchasing investment properties, because they have features that accommodate such property types specifically. Debt service coverage ratio loans (DSCR), for example, define loan terms such as the amount and interest rate according to the property’s income potential rather than the borrower’s personal finances. These loans are best for experienced or novice investors, self-employed and portfolio building. They are true investment property loans for properties you won’t occupy, prioritizing the rental income over your personal finances.

What are workarounds for using a FHA loan for investment properties? 

• House Hacking: You can buy a multi-unit property (2-4 units) with an FHA loan, live in one unit, and rent out the others. This is legal since you’re occupying the property as your primary residence while generating rental income.
• Converting After One Year Residency: Once you’ve met the one-year occupancy requirement, you can move out and convert the property to a rental. You can even purchase another primary residence with a new FHA loan (though you can generally only have one FHA loan at a time unless specific circumstances apply).

Can I refinance my FHA loan to convert it into a conventional loan for investment purposes?

Yes, refinancing is a popular choice for transitioning the property into an investment after meeting FHA guidelines.

What are loans for investment properties other than FHA loans? 

Dedicated mortgage products like the following are generally better suited for investment properties:

• DSCR loans: Qualify based on the property’s potential income rather than your own. Get up to 85% LTV with Defy Mortgage on a single-family home purchase (Min FICO: 740; Max amount: $1.5M. Max cash-out LTV: 80%). LLC ownership allowed for some properties.
• Bank statement loans: Qualify using bank statements to directly demonstrate how much you’re making overall. Up to 90% LTV with 740+ FICO (Max amount: $2M in TX; Max cash-out LTV: 80%). 
• P&L loans: Use business P&L statements to represent your income rather than traditional W-2s and tax returns. Up to 90% LTV (80% if cash-out) with 740+ FICO, max amount: $2M. 
• Asset-depletion loans: Use liquid assets like stocks, money market, savings, and retirement accounts to stand in for your personal income. Up to 80% LTV for purchase and R/T refi.
• Jumbo loans: Access high-value properties priced above your county’s local conforming loan limits. Up to 90% LTV.