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A Complete Breakdown of FHA Loan Occupancy Requirements

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.

FHA Occupancy Requirements

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 moves 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.

Exceptions to Occupancy Requirements

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.

Secondary Residence

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.

Renting an FHA-backed Home

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.

FHA Occupancy Scenarios

To better understand the FHA’s owner-occupancy standards, here are a few common scenarios to consider:

  1. Standard occupancy - The borrower buys the home, moves onto the property within 60 days and stays there for the majority of the calendar year (minus a few vacations).
  2. Job relocation - The owner moves into the property within 60 days. A job relocation puts them out of state 6 months later, well before the one-year occupancy requirement is up. Because this qualifies as an exception, he could be eligible to use an FHA loan to buy another home in his new location.
  3. Family expansion - Co-borrowers purchase a two-bedroom home. One month later, they find out they’re having twins. Because of the change in family size, they may be eligible to waive the one-year occupancy requirement and use an FHA loan to pay for a larger property.
  4. Renting out the home - The buyer purchases the home with the intent to rent it out later on. He moves into the property within 60 days and lives there for the majority of the year. After one year has passed, he moves out of the property and rents the home out for added monthly income.
  5. Divorce - Co-borrowers divorce 3 months after closing on an FHA-backed home. One borrower remains behind, fulfilling the one-year occupancy standard. The other borrower may be free to purchase another home using an FHA loan in their desired location.

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.