Federal Housing Administration (FHA) mortgage loans, which are government backed, have more lenient qualification requirements than conventional loans. However, theyâre not used to fund the purchase of an investment property, with an exception. If youâre willing to commit to treating one unit of a multi-unit investment property as your primary residence for at least a year, an FHA loan may be a great option for you.
In short, you can use an FHA loan for an investment property if youâre willing to live there.
For example, a real estate investor could purchase a fourplex, live in one unit, lease the other units out and get a return on investment from the rental payments they collect. Youâll also need to meet some other criteria, which weâll discuss later.
The Federal Housing Administration (FHA) is a popular loan program that helps make homeownership accessible for many buyers. A key question homebuyers ask is can I use rental income to qualify for an FHA loan? The answer is yes, FHA does allow rental income to be used toward qualifying income requirements. However there are specific guidelines lenders must follow.
What is an FHA Loan?
First, let’s provide some background. FHA loans are a type of government-insured mortgage backed by the Federal Housing Administration. Some key features of FHA loans include:
- Low down payments – only 3.5% required from borrower
- Lenient credit requirements – minimum 580 FICO score
- Low mortgage insurance premiums
- Limit on upfront costs
These features make FHA loans favorable for first-time buyers and those with lower incomes or credit scores. The tradeoff is FHA loans require mortgage insurance.
FHA Requirements for Using Rental Income
FHA has specific stipulations on using rental income from investment properties or 2-4 unit properties where the borrower will occupy one unit. Here are the key criteria:
Documentation Needed
To use rental income for qualifying, FHA requires documentation to verify the income including:
- Lease agreements
- Two years of tax returns showing rental income Schedule E
- Proof of deposit showing receipt of rents
Property Ownership
The borrower must currently own the property generating rents. Rental income from properties not yet owned by the borrower cannot be counted.
Minimum Length of Rental History
FHA prefers a 2 year history of rental income but will consider less. Gaps over 3 months will need to be explained.
Expenses Deducted
FHA requires subtracting 25% from gross rents for vacancies and maintenance. Lenders deduct PITI and any HOA fees before calculating net rental income.
Loans on Investment Property
If the borrower has a mortgage on the rental property, the monthly payment must be counted in debt-to-income ratios.
Rental Income Limits
For 1-2 unit primary residences, FHA sets no limit on the amount of rental income that may be used. For 3-4 units, rents must cover PITI on the new loan.
How Rental Income is Calculated for FHA Loans
FHA has a specific method lenders must use to calculate rental income from the subject property or other investments owned by the borrower:
- Document 12 months receipt of rental income from each property
- Use Schedule E to calculate net rental income = rents – expenses – depreciation
- For properties not yet on Schedule E, use 75% of appraised market rent
- Subtract PITI + HOA fees from net rent to determine cash flow
- Add positive cash flow to income, negative cash flow is a liability
- Apply rents from the subject property only after reducing by 25% vacancy factor
Following these steps allows lenders to accurately assess the stable rental income that can be counted towards DTI requirements.
Examples of Using Rental Income with FHA Loans
To better understand rental income guidelines, let’s look at a few examples:
Borrower Owns a 2 Unit Property
John owns a 2 unit rental property and lives in one unit. The other unit rents for $1000 per month. For qualifying income, the lender must:
- Document 12 months of $1000 rents received
- Reduce gross rents by 25% = $750 adjusted monthly rent
- Subtract expenses and PITI from Schedule E
- Add any positive cash flow to John’s income
Since John resides in the 2 unit property, FHA does not limit the amount of rents that may be counted.
Borrower Buying a 3 Unit Property
Mary is purchasing a 3 unit property and will live in one unit. She provided signed leases showing the other units rent for $1500 each. Since there is no 2 year history on this property, the lender must:
- Take 75% of the $3000 gross rents = $2250 adjusted rent
- Subtract PITI + expenses on the new mortgage
- Add any positive cash flow to Mary’s income
For 3-4 units, rents must total at least 100% of the new PITI for FHA financing.
Borrower Owns Multiple Rental Properties
James owns 3 rental properties in addition to his primary residence. The lender will:
- Use Schedule E to document rents, expenses, and cash flow from all 3 properties
- Subtract any mortgages on investment properties as debts
- Add net rents that are positive cash flow to James’s income
FHA sets no limit on the number of properties or amount of rental income that may be used if properly documented.
The Bottom Line – FHA Allows Rental Income
Purchase A Multiunit Home
As mentioned, you can purchase a multiunit property with up to four units with an FHA mortgage. All the units can be occupied by tenants except one, which you must live in to meet your FHA requirements. Technically, a home with up to four units is a single-family residence, and a home with five or more units is considered a multi-family home. If your home meets the requirement of having two to four units and one unit is owner-occupied, you should be fine.
Depending on the rental income from your tenants, you may be able to stay at your property at essentially no monthly cost â and even earn a profit from your tenantsâ rental payments.
Purchase A Fixer-Upper With An FHA 203(k) Loan
FHA loans have minimum property requirements, but FHA 203(k) loans allow FHA home buyers to buy homes that fail to meet the FHAâs minimum property standards. With an FHA 203(k) loan, you can bundle the cost of repairing the home into the mortgage.
Again, youâll have to live in at least one unit of the home. But just like standard FHA loans, FHA 203(k) loans are for properties with up to four units.
FHA Loan with Rental Income – Rental Income Guidelines
FAQ
Can I use rental income on an FHA loan?
The new policy regarding ADU rental income being applied to FHA loans took effect upon its announcement, in October 2023. Going forward, many California homeowners with accessory dwelling units will be able to use a portion of that income to quality for an FHA loan.Nov 6, 2023
Can you turn an FHA loan into a rental property?
An FHA loan must be used to purchase a primary residence. It cannot be used to finance a second home, a rental home, a vacation home, or an investment property.
Can you use FHA for rent to own?
The FHA Rent to Own Program lets you rent a home now and buy it later using an FHA loan. Part of your monthly rent is saved and goes toward your down payment when you’re ready to buy. You and your landlord agree on a purchase price and rental period.
What is the FHA 75% rental income rule?
… to qualify under the Self-Sufficiency Rule, the Qualifying Rent (75% of Total Rent Potential) must be equal to or greater than the Monthly Mortgage Payment
Can you get an FHA loan if you have rental income?
FHA loan rules for single family purchase loans include guidelines for the lender to use if the applicant has rental income. Some want to know whether it is possible to qualify for an FHA mortgage using rental income. The real issue is whether the rental income meets FHA loan rules.
What is considered rental income under the FHA loan program?
FHA loan rules in HUD 4000.1 address this on page 202, starting with the definition of what is considered rental income under the FHA loan program: “Rental Income refers to income received or to be received from the subject Property or other real estate holdings.”
Does FHA take rent from rental units?
FHA will typically take 75% of the projected rent from the rental units when calculating your income, similar to conventional rules. A recent update, FHA announced in 2025 that they will permit income from boarders (renting out a room in your primary residence) to count in some cases.
Do FHA loans affect rental income?
Owner-Occupancy Requirement: For multifamily properties, FHA loans typically require the borrower to occupy one of the units, thus affecting the calculation of rental income. Understanding these nuances is vital for anyone considering an FHA loan where rental income is a component of their qualification profile.
What percentage of FHA loan applicants use rental income?
1. Approximately 25% of FHA loan applicants use rental income to qualify. 2. FHA loans allow borrowers to include up to two years of rental income in their loan application. 3. Over 60% of property investors who use FHA loans rely on rental income as a significant part of their investment strategy.
Can I use projected rental income to qualify for FHA loan?
No, the FHA generally doesn’t allow you to use projected rental income from a property you haven’t purchased yet to qualify for the loan on that same property. The rental income must be derived from a departing residence, a property you already own. 7. What happens if the rental income is less than the mortgage payment on the departing residence?