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How to Use an FHA 203K Loan to Rehab Your Investment Property

How to Use an FHA 203K Loan to Rehab Your Investment Property

Architecture is standing in front of a house, home rehab

A borrower can rehab an investment property with the FHA 203k loan by purchasing and renovating a multifamily (2-4 unit) property. The borrower must then reside in one of the units as his or her primary residence for at least a year to satisfy FHA’s permanent residence requirement before renting out the property.

What if a Borrower Already Owns a Home?

If a person has already purchased a home, he or she can refinance his or her current mortgage using the FHA 203k loan. This presents smart borrowers with another legitimate opportunity to take advantage of the FHA 203k loan. A borrower could spend the 203k loan on refinancing his or her current mortgage, renovate the home, then move after twelve months and rent out the home as an investment property.

FHA allows a borrower to rent out a property he or she still owns with the 203k loan, provided:

  • He or she met the 12-month permanent residence condition
  • He or she moved for a valid reason, such as moving to a bigger house to accommodate a growing family or a job relocation

If the borrower already moved and rented his or her previous home out, then he or she wouldn’t qualify for the 203k rehab loan, as the home isn’t his or her primary residence anymore.

Can the FHA know the Borrower’s Real Intentions?

Some people earn decent livings by purchasing fixer-uppers, rehabbing them, and then selling them at a profitable price. Others may try to exploit the FHA 203k program by lying about their plan of making the home their primary residence. 

Lying while making a mortgage application is, however, illegal and could result in criminal prosecution. An email or any other communication to a contractor indicating that a borrower isn’t intending to reside in the home could form part of the evidence in a court case.

A repeat FHA purchase wouldn’t be a sustainable strategy in the long term. In fact, FHA cannot approve a borrower for more than one 203k loan at a time. A real estate attorney can explain to a borrower the key requirements of an FHA 203k loan and help the borrower determine whether it’s a viable financing option for his or her situation.

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