Real estate investors use a variety of strategies to earn money. Some are in the business of rehabilitating homes, while others purchase rental properties to generate cash flow. Depending on the structure of your business, you may be able to take advantage of an FHA loan to finance your real estate acquisitions.
FHA loans are mortgages that are backed by the Federal Housing Administration. Though the FHA does not directly lend money, it insures mortgages that are offered by FHA-approved lenders. Many people assume that these programs are only for first-time homebuyers. However, these mortgages are a popular option for real estate investors who are able to comply with the program’s criteria.
Advantages of an FHA Loan for Investors
Investors are attracted to FHA loans because of the small down payment option. If you have a minimum credit score of 580, you can purchase an investment property with a 3.5 percent down. Since cash flow is an important aspect of any business, this helps to avoid the problem of tying up large amounts of money on a single investment.
Since they are insured by the federal government, these mortgages have competitive interest rates. As a result, monthly payments are lower than those of conventional offerings. If you are planning on keeping the property for a long period of time, the cost savings over the life of the loan will be significant.
Disadvantages of an FHA Loan for Investors
FHA loans are only available for residential properties that consist of one to four units. In addition, the property must be owner-occupied. Therefore, an FHA loan is suitable for an investor who is interested in purchasing a multifamily property and living in one of the units. The other units can be rented out.
Additionally, you are permitted to obtain one FHA loan at a time. If you are an investor who is interested in purchasing multiple properties, you will need to pursue traditional financing options for subsequent acquisitions.
Investors must meet the FHA’s debt-to-income ratio requirements. Therefore, you must be able to show that your business has the proper balance of income and debt to qualify for a loan.
FHA 203(k) Loans
If you are an investor who is interested in rehabilitating distressed properties, an FHA 203(k) loan might be a viable option. These low-interest construction loans are ideal for individuals who are willing to reside in the properties they are fixing. Once repairs are complete, the property can be sold.
FHA loans are ideal for certain types of real estate investors. To see if your business model fits within the FHA’s criteria, contact an FHA-approved lender. A federally-backed loan might be a smart move for your growing business.