FHA Loan for Investment Property
FHA loans are for primary residences, but under certain conditions, an investment property can be purchased.
An FHA loan is a type of mortgage that is insured by the government and is designed to make it easier for people to buy a home.
FHA allows multi-unit properties to be purchased with their program, anywhere from 2 units to a max of 4 units.
See also:
Credit score requirement for an FHA investment property
When purchasing a multi-unit property, the credit score requirement is usually 620; some lenders may require it to be higher.
Coole Home requires a minimum credit score of 620.
Lenders and the FHA want to make sure you are financially responsible and that you aren’t going to default on the loan.
One way to determine that is by looking at your credit report.
In addition to the credit score, your credit history will also be reviewed.
This is what mortgage underwriters will look at on the credit report:
- Payment history: The underwriter will review your credit profile to determine how you pay your bills. Do you have a history of making payments on time? They’ll examine the following: late payments, collections, and judgments.
- Credit utilization: Lenders want to see that you are not heavily reliant on credit. They will look at how much credit you have available compared to how much you are using. This also affects your credit score. The lower the balance on your credit cards, the better.
- Credit mix: Lenders want to see that you can handle different types of credit, such as credit cards, installment loans, and mortgages.
- Length of credit history: Lenders want to see that you have a history of using credit responsibly. Short credit history can be a red flag.
Lenders will use this information to assess your creditworthiness and make a decision on whether to approve the loan.
Even if you meet the minimum credit score requirements, your loan can still get denied.
The credit score isn’t the only factor. Mortgage underwriters will review your income, employment history, debt-to-income ratio, assets, etc.
Down payment for FHA investment property
One of the reasons why an FHA loan is so outstanding is because of the low-down payment.
FHA only requires a down payment of 3.5%. Other loan types, like conventional ones, require 15% down on investment properties.
This is especially beneficial for those looking to earn rental income but don’t have a lot of money saved up for a down payment or for those who want to preserve their cash for other investments.
Drawbacks of an FHA loan for an investment property
Earlier, we mentioned that an FHA loan can be used to purchase an investment property under certain conditions.
One of those conditions is that you HAVE to occupy one of the units as your primary residence.
If this is not possible, then you cannot purchase a multi-unit using FHA financing.
Other FHA drawbacks:
- Private Mortgage Insurance: Since the down payment is less than 20%, private mortgage insurance is required, which is an additional cost added to the monthly mortgage payment. The MIP can be pretty high and can add up over time, making the loan more expensive in the long run.
- Maximum loan limits: FHA loans have maximum loan limits, meaning you can’t purchase more than the limit. This can make it difficult for you to find a property that fits within your budget. Limits are different for each county. Check them out here.
- Property restrictions: FHA loans have strict guidelines for the condition of the property being purchased. This can make it more difficult to find a suitable property that meets the requirements, particularly for those needing renovation.
- Funding fee: In addition to the monthly private mortgage insurance, FHA loans require a funding fee to be added to the loan (also known as the annual premium). This is 1.75% of the loan amount and usually is rolled into the loan.
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