FHA loans are designed to make homeownership more attainable for low- and moderate-income earners. Because of this, it is typically not for use on investment properties, vacation homes or second home purchases. In most cases, the FHA requires borrowers use the property they’re purchasing as their primary residence.
The FHA typically requires borrowers to occupy the property they’re buying and use it for their primary residence for at least one year. By FHA standards, a primary residence is one in which the owner occupies the property for the “majority” of the year. The FHA also requires that the buyer move into the property within 60 days of closing on their home.
These requirements are intended to prevent investors from profiting off the government loan program’s affordable rates and less stringent lending guidelines. In order to prove their intent to live on the property (and not use it as a second home or investment), buyers will need to check the “Primary Residence” box in the Uniform Residential Loan Application they file with their chosen mortgage lender.
Violating the FHA’s occupancy requirements could qualify as fraud and lead to a civil or criminal lawsuit against the borrower. Typically, borrowers are also not allowed to have more than one FHA loan at once. If your plan is to move out early and purchase another home with an FHA mortgage, talk to a lender about your options.
There are a few exceptions to the FHA’s occupancy rules. Military deployment or a job relocation that puts the owner outside a 50-mile radius of the home are two of the most common. Divorce or an increase in family size (which may require a larger property) could also qualify as exceptions.
Co-borrowers can also serve as exceptions. As long as at least one borrower lives in the home, all co-borrowers do not have to occupy the property within 60 days or for the majority of the year.
In some cases, an FHA loan can be used on a secondary residence — a property the borrower occupies in addition to their primary one. FHA mortgages on secondary homes are only permitted when affordable rental housing is not available in the area (or within reasonable commuting distance of the borrower’s work). The maximum loan amount is 85% of the lesser of the appraised value or sales price.
In order to use an FHA loan on a secondary residence, borrowers will need to request a hardship exception from the local Housing Opportunities Commission through their lender. The secondary home cannot be a property intended for vacation or recreational purposes.
After occupying an FHA-backed property for at least the first year, owners are free to use the property as they wish. This can include renting the property out or using it as a secondary or vacation home. Generally, the owners will still be limited to one FHA mortgage at a time, even after the one year occupancy requirement has been met.
To better understand the FHA’s owner-occupancy standards, here are a few common scenarios to consider:
FHA borrowers who will be unable to fulfill their occupancy requirements should talk to their lender about their options. Failing to meet these standards could have legal and financial repercussions if the proper steps are not taken.