4. Investment Property Eligibility and Underwriting Requirements

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Introduction

This topic contains information on eligible investment properties, including

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a definition of investment property

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loan transactions in which an investor may obtain an FHA-insured mortgage

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underwriting considerations on investment properties

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seven unit-limitation on investment properties, and

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restriction on investment properties for hotel and transient use.

Change Date

May 10, 2009

4155.1 4.B.4.a Definition: Investment Property

An investment property is a property that is not occupied by the borrower as a principal or secondary residence.

4155.1 4.B.4.b Loan Transactions in Which a Private Investor May Obtain an FHA-Insured Mortgage

With permission from the appropriate HOC, private investors, including nonprofit organizations that do not meet the criteria described in HUD 4155.1 4.A.6.a, may obtain an FHA-insured mortgage when

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purchasing HUD Real Estate Owned (REO) properties, or

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obtaining a streamline refinance without an appraisal.

Note: In HUD REO transactions, owner occupancy is not required when the jurisdictional HOC sells the property and permits the purchaser to obtain FHA-insured financing on the investment property.

Reference: For additional qualifying information on streamline refinances without an appraisal, see HUD 4155.1.3.C.2.

4155.1 4.B.4.c Underwriting Considerations on Investment Properties

Underwriting considerations on investment properties are listed below.

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Individual investors who credit qualify may assume mortgages made on investment properties. This applies to the transactions described in HUD 4155.1 4.B.4.b, as well as to investment properties purchased before the 1989 ban on investors that have been subsequently streamline refinanced.

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Underwriting considerations regarding such issues as qualifying ratios and the treatment of projected rental income are described in HUD 4155.1.4.E.4.

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Adjustable rate mortgages (ARMs) and graduated payment mortgages (GPMs) are not permitted on investment properties.

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For investment properties, FHA will not insure loans made solely in the name of a business entity (such as a corporation, partnership, or sole proprietorship), except for streamline refinances in which the mortgage was originally insured in the name of a business. Additionally, FHA requires that

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one or more individuals, along with the business entity or trust, must be analyzed for creditworthiness

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the individual(s) and business entity or trust must appear on the mortgage note, and

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if all parties appear on the property deed or title, they must also appear on the security instrument (such as the mortgage, deed of trust, or security deed).

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For purchases of HUD REO properties, owner occupancy is not required when the jurisdictional HOC sells the property and permits the purchaser to obtain FHA-insured financing on the investment property.

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Streamline refinancing without an appraisal is permitted on investment properties.

4155.1 4.B.4.d Seven Unit Limitation for Investors

Qualified investor entities are limited to a financial interest (that is, any type of ownership, regardless of the type of financing) in seven rental dwelling units, when the subject property is part of, adjacent to, or contiguous to, a property, subdivision or group of properties owned by the investor.

The units that count toward this limitation include

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each dwelling unit in a two, three, and four family property, and

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the rental units in an owner-occupied two, three, or four unit property.

Notes:

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The lender is responsible for ensuring compliance with this regulation.

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Waivers to the seven unit limitation can only be initiated by the jurisdictional HOC for good cause.

Reference: For more information on the seven-unit limitation, see 24 CFR 203.42.

4155.1 4.B.4.e Restriction on Investment Properties for Hotel and Transient Use

Investors must assure FHA that investment properties purchased will not be used for hotel or transient purposes, or otherwise rented for periods of less than 30 days.

Completion of Form HUD 92561, Hotel and Transient Use Certification, provides this assurance and is required on every application for

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two, three, or four family dwellings, and

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single family dwellings that are one of a group of five or more dwellings held by the same borrower.