Can You Rent Out Your Home With an FHA Loan?

Introduction

Can you rent out your home with an FHA loan? is a common question for homeowners with FHA mortgages. The FHA loan program has specific guidelines regarding renting out properties financed with these government-backed loans. Here is a comprehensive overview of FHA rental property rules, requirements, and risks to help you make an informed decision.

FHA Loan Overview

The Federal Housing Administration (FHA) is a government agency that provides mortgage insurance on loans made by approved lenders. Can you rent out your home with an FHA loan? Depends on the type of FHA loan.

Key features of FHA loans:

• Require low down payments – as low as 3.5%
• More flexible credit score requirements
• Lower interest rates than conventional loans
• Limited to low- and moderate-income borrowers
• Secured by the FHA mortgage insurance

FHA loans include:

FHA 203(b) loans – for purchasing or refinancing primary residences

FHA 203(k) loans – for purchasing or refinancing fixer-uppers

FHA 245(a) loans – for purchasing condos/co-ops

FHA Owner-Occupancy Requirements

The most important factor when weighing can you rent out your home with an FHA loan? is the FHA owner-occupancy rule.

FHA requires you to move into the property within 60 days of closing and occupy it as your primary residence for at least 1 year. This is outlined in HUD Handbook 4000.1.

You must live in the home for at least one year before considering renting it out with an FHA loan.

When Can You Begin Renting Out an FHA-Financed Property?

Can you rent out your home with an FHA loan after living there for a year? Yes, with proper approvals and an eligible reason.

The FHA allows homeowners to stop occupying their property as their primary residence under certain circumstances:

Relocation for a job – Written verification from your employer of relocation at least 50 miles away required.

Death of borrower – Remaining co-borrowers can continue occupancy for a year, then rent out the home.

Divorce – Ex-spouses who qualify can remove the other spouse from the mortgage and rent out the home.

Natural disaster – FHA may grant permission to rent out a damaged home.

Other extenuating circumstances – Preapproval required based on documented hardship.

In these situations, you must submit a written request to your lender and get FHA approval before renting out the property.

Refinancing an FHA Loan on a Rental Property

If you have an existing FHA mortgage on a property and want to rent it out, can you refinance to a conventional loan? This allows you to keep the property as a rental long-term.

Yes, you can refinance into a conventional loan once you meet these criteria:

• Primary residence requirement of 1 year met
• Received approval from the lender/FHA to stop owner-occupancy
• Have sufficient equity in the property
• Qualify for the new loan based on income from the rental property

Refinancing to a conventional rental property loan gets rid of FHA restrictions. Your lender can advise on loans programs that fit your situation.

Risks of Renting Out an FHA-Financed Property

While the FHA does allow renting out under certain conditions, there are risks to weigh before moving forward:

Mortgage fraud – Falsely claiming to meet primary residency requirements could be considered mortgage fraud. This leads to stiff penalties.

Loan acceleration – If caught violating FHA guidelines, the loan could be called due immediately in full.

Foreclosure – Income from renting out may be insufficient to cover the mortgage, leading to foreclosure and severe credit damage.

FHA insurance premiums – Owner-occupied properties have lower insurance premiums. Renting out may bump you into a higher premium bracket.

Difficulty refinancing – Lenders will likely be hesitant to refinance a mortgage if you violated FHA policies.

Repayment of rental income – You may have to repay all rental income for the period you rented the home but were supposed to live there.

These substantial risks demonstrate why it is critical to follow proper procedures when renting an FHA home. Work closely with your lender and the FHA to avoid violations. Consider consulting a real estate attorney as well.

FHA Streamline Refinances on Rental Properties

Existing FHA loans may be eligible for streamline refinancing – a faster, easier process than a conventional refinance. This retains the FHA insurance while lowering the interest rate.

Can you do an FHA streamline refinance on a rental property? Only if you have authorization from the FHA to rent out the property prior to refinancing. All FHA requirements related to owner occupancy and leasing apply.

Alternatives to Renting Out FHA Properties

Given the tight restrictions around renting out FHA-financed homes, you may want to consider other options:

Continue living in the home as your primary residence until you reach 20% equity. This provides flexibility to rent out or sell.

Refinance into a conventional loan once equity conditions are met.

Sell the property and use proceeds to purchase a separate investment property that allows renting.

Keep the home vacant rather than leasing it out when away for brief stints (e.g. short-term job assignments, caring for family members).

A qualified real estate agent can help you navigate choices beyond renting out the FHA property.

Key Takeaways: Can You Rent Out Your Home With an FHA Loan?

• FHA loans require owner-occupancy of 1 year before renting out.
• After 1 year, you must get written FHA approval based on eligible hardship reasons to lease the property.
• Refinancing your FHA loan to a conventional rental property mortgage removes FHA restrictions.
• Violating FHA guidelines by renting without approval risks mortgage fraud charges, loan acceleration, and repayment of rental income.
• Consider alternatives like selling and buying a separate rental property if you want income from leasing long-term.

Can you rent out your home with an FHA loan? Only with strict adherence to FHA owner occupancy rules and under limited exceptions. Weigh your options carefully and consult the FHA, lenders, attorneys, and real estate professionals before renting out an FHA-financed home. With proper procedures, you can avoid violations and preserve your financing.

Reference

Consumer Financial Protection Bureau – FHA loans: https://www.consumerfinance.gov/owning-a-home/loan-options/fha-loans/

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