September 18, 2018
FHA home loans are generally intended for owner/occupiers; there is an occupancy requirement for the FHA single-family home loan program that basically allows loans for principal residences and denies loans for those who do not intend to occupy the home within 60 days of loan closing (unless other arrangements are made for a delayed move-in which may or may not be possible depending on the lender).
HUD 4000.1 has the rules that govern occupancy and the purchase of homes considered to be investment properties. HUD 4000.1 begins by defining what it considers an investment property to be:
“An Investment Property refers to a Property that is not occupied by the Borrower as a Principal or Secondary Residence.”
That is fairly simple, and the rules in this section go on to add:
“Investment Properties are not eligible for FHA insurance.”
But immediately following this statement, HUD 4000.1 goes on to add an exception.
“Investment Properties are eligible if the borrower is a HUD-approved Nonprofit Borrower, or a state and local government agency, or an Instrumentality of Government. Investment Properties are eligible for insurance under the HUD Real Estate Owned (REO) Purchasing product, except under the 203(k) program.”
Most borrowers understand how the non-profit and/or government agency rules might apply. But in the case of the 203(k) program that might not be so clear.
FHA loan rules in this area seem to be designed to insure the FHA 203(k) rehab loan remains a tool for owner/occupiers to use to buy and repair a fixer-upper property or to repair/remodel a home already owned by the individual. The FHA 203(k) rehab loan program is intended for owner occupiers and not for investments.
Basically, a home to be purchased with an FHA mortgage must be primarily residential in nature, must be occupied by the borrower, and cannot be used for transient occupancy under 30 days at a time. Condohotels, bed-and-breakfasts, sorority houses, frat houses, and other commercial enterprises cannot be approved for an FHA mortgage.
In some limited cases, and lender standards will apply above and beyond FHA loan rules (you will need to see if what the FHA allows is permitted by your participating FHA lender) an FHA home loan may be approved for a secondary residence. This is usually permitted only with qualifying circumstances that may be related to job changes or family changes.
The rules for such transactions includes a requirement for written approval from an FHA authority after determining that:
- the Borrower has no other Secondary Residence;
- the Secondary Residence will not be a Vacation Home or be otherwise used primarily for recreational purposes;
- the commuting distance to the Borrower’s workplace creates an undue hardship on the Borrower and there is no affordable rental housing meeting the Borrower’s needs within 100 miles of the Borrower’s workplace; and
- the maximum mortgage amount is 85 percent of the lesser of the appraised value or sales price.
The lender’s standards will also apply; ask your loan officer whether such a loan is possible at that financial institution and what documentation is required for FHA loan approval.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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