Can you rent out your FHA-financed home after closing? Yes, you can. But no, not right away.
The FHA loan comes with several restrictions and requirements that must be followed to avoid consequences such as the risk of foreclosure.
So, before you set out to get an FHA loan for the sole purpose of renting, you may want to read on to find out what conditions must first be met.
This article will explain exactly how renting out a home with an FHA loan works and give you all the information to help you make the best homeowner decision for you.
Ready?
What is an FHA Loan?
FHA loans are mortgages backed by the Federal Housing Administration that allow borrowers to purchase or refinance a home with as little as a 3.5% down payment.
They’re one of the most popular types of home loans for first-time buyers, offering several benefits compared to conventional mortgages, including lower closing costs and flexible credit requirements.
Additionally, FHA loans are often easier to qualify for since they require only a 3.5% down payment versus the typical 20% down payment required on conventional mortgages, and a credit score of 580 – with exceptions.
These factors can make them an attractive option for borrowers looking to buy or refinance a home.
Can You Rent Out a Home With an FHA Loan?
While buying your home with an FHA loan is an affordable way to invest in real estate without having to make a large down payment or purchase the entire property in cash, these homes are only meant to be used as the homeowner’s primary residence and not as rental properties.
Still, having met the required criteria, you may be able to put your home out for rent, and sincerely, it might actually be a great option for you.
We’ll tell you why, but first, let’s discuss the criteria around the FHA-loan home rentals and how long before you can begin.
How Long Before I Can Rent My Home With an FHA Loan?
The length of time you should wait before renting out your FHA home depends on what you are renting out.
Here are the rules surrounding these:
- Single-family unit – If you want to rent out a single-family unit, you must occupy and use the home as your primary residence for at least 12 months. After the specified period, you are legally free to fully use your property as a rental property and are no longer required to reside there.
- A room – FHA has no legal requirements that prevent you from renting out a room immediately as long as you are still living in and using the home as your primary residence.
- Multi-family units – If you purchase a property with multiple units, you can rent out the units immediately as long as you occupy one of the units and use it as your primary residence.
Benefits of Renting Out Your FHA Home?
Are there benefits to renting out your FHA-financed dream home? Of course! Renting out your home with an FHA loan offers many advantages.
Here are just a few.
- FHA’s flexible requirements – FHA’s flexible requirements make homeownership possible for many who do not qualify for conventional mortgages. This makes it possible to acquire an eventual rental home with less money than what is required for other options.
- Building equity – By renting out your property, you can take advantage of tax deductions for expenses related to owning and maintaining a rental property.
- Stability – Renting out your FHA home can provide a sense of security and stability. When unable to sell your property, renting it out can provide a steady income stream that can help you weather any financial storms.
- Great fixer-upper option – Buying a fixer-upper as a rental property is a great idea. You can greatly improve the value of the home and the rental value by making a few repairs and renovations. FHA’s 203k loan is one of the best and most affordable ways to buy and renovate a fixer-upper. It rolls the value of the home and the renovations into one loan and you benefit from a HUD-approved consultant.
- Additional income – By renting out your property, you can earn a steady stream of cash flow that can help you cover the loan amount you qualified for and other expenses associated with homeownership.
Before you go down this path, though, it’s also important to research any disadvantages or pitfalls with renting your FHA home, so that you can make sure this option is right for your financial situation and lifestyle.
Pitfalls of Renting Your Home With an FHA Loan
Just like we mentioned, understanding the potential pitfalls of renting your FHA-financed home would help you make a more informed decision.
You’ve seen some benefits, now let’s take a look at the potential pitfalls:
- The intention of FHA loans – FHA loans are not designed to be used for rental properties. So, you risk approval if you mention that you are buying the property with the intention to rent it and not live in it. Keep that to yourself throughout the application process, especially if you are buying a single-family unit where renting immediately is not an option.
- Repair and maintenance costs – Tenants are sometimes known not to handle properties with as much care as the homeowner would. In any case, you will be responsible for many of those repairs. So, you must be financially prepared to cover these costs at a short notice.
- Unreliable income – Just because you make your property a rental property does not mean you will be able to secure a tenant. You will also not be able to ensure you have a tenant consistently through the years. So, friendly advice? Don’t count on your rental income to offset your mortgage payments or other important costs.
Consider these carefully before deciding on such an arrangement.
Can You Airbnb With an FHA Loan?
Unfortunately, this is where FHS draws the line; it is not legally possible to Airbnb your FHA home.
Remember that FHA loans are meant for residential purposes and not to purchase commercial properties. To prevent homeowners from using it for commercial use – like Airbnb use – FHA loans come with a ‘transient use’ rule.
FHA’s transient occupancy rule states that a home purchased with an FHA loan cannot be rented to a party for less than 30 days or for hotel purposes.
This in turn prohibits an FHA home from being used as a B&B, hotel, lodge, or Airbnb. Doing so will be in breach of your mortgage contract and legal action can be taken against you.
Frequently Asked Questions
How long do you have to keep a house with an FHA Loan?
There are technically no time restrictions associated with selling your FHA home. So, you can sell it at any time. However, there are restrictions on buying a home using an FHA loan.
However, if you wish to buy a home using an FHA loan, the seller must have owned the home for more than 90 days. If they have not, you will not be able to use an FHA loan to purchase the property.
How does rental income work with FHA?
It is possible for FHA loan lenders to consider rental income in their valuation of your ability to service a loan.
You can use the rental income you are making from another property as part of your gross income. Additionally, you can use the potential rental income of the home you are trying to purchase with an FHA loan as part of your future gross income.
To calculate your rental income, lenders will take your net rental income, plus depreciation from schedule E of your tax returns, and then divide that amount by 12.
If you do not have a history of rental income to use to calculate, lenders can use 75% of the lesser of these two options:
- The fair market rent reported by an appraiser,
- The rent outlines in the lease agreement for the property.
Looking for a property in any of these areas? Reach out to us and we’d help you find the best deals per your financial situation.
What will disqualify a home from an FHA loan?
When it comes to FHA loans, there are a few things that will disqualify a home from being eligible for financing. These include:
- If the home is not in good condition and does not meet certain health and safety standards set by the Federal Housing Administration (FHA).
- If the property has structural damage or other issues that would make it unsafe to live in.
- If it is being used primarily for commercial purposes.
- If it is outside the geographical areas where FHA loans are eligible.
Should I Rent Out My FHA Loan?
You have all the cards now, so that’s for you to decide.
The FHA has strict rules and regulations in place when it comes to renting out a property, and these need to be followed carefully in order for the loan to remain in good standing.
If you’re having challenges with any of the cards dealt to you, give us a call, and we’ll be happy to help you figure it out.
