The Basics

• In general, FHA only insures mortgages for borrowers who intend to occupy the home as their primary residence for most of the calendar year. In some cases, FHA insures investment properties for certain government or nonprofit entities and for second homes for borrowers who meet requirements establishing bona fide part-time occupancy of a home.
  
  FHA loans require a 3.5 percent down payment. To prevent for-profit investors from participating in its programs, FHA requires that borrowers move in within 60 days of closing a purchase. After refinancing, the borrower is expected to remain an owner-occupant for at least most of the year.
  
  

Considerations

• At least one of the borrowers signing the mortgage note and deed of trust must intend to occupy the home if refinancing with one of FHA's programs. The three FHA refinance programs are streamline, rate and term, and cash-out refinance. The borrower of a single-unit residence may rent out rooms to boarders or receive rent from roommates; however, FHA does not consider such funds as rental income to qualify for a refinance.
  
  Borrowers occupying two-unit to four-unit homes typically rent out the remaining dwellings. When underwriting the FHA refinance for small multiple-unit properties, the lender does consider rent generated from the units as income for qualification purposes.
  
  

Multiple-Unit Refinance

• FHA underwriting requires various forms of documentation to establish that rental income generated by two-unit to four-unit properties is stable. A percentage of the rent may be used to help the homeowner qualify for a refinance of the property if he provide the lender with the following: a current lease agreement or agreement to lease; Schedule E of IRS Form 1040, and a rental history for the previous 24 months free of gaps, according to FHA Outreach.
  
  In general, FHA reduces the rental income by 15 percent to compensate for property maintenance and vacancy. The difference between the gross rent and the vacancy rate determined by the regional HUD Homeownership Center is considered income.
  
  

Exceptions

• A homeowner who intends to vacate the home in favor of another principal residence and rent it out after the FHA refinance may not apply as an owner-occupant and may not use the rental income to qualify for the new loan. Exceptions to this rule apply, including two notable exceptions: The homeowner experiences an employment relocation not within commuting distance and he has secured a one-year lease agreement and security deposit from a tenant, or the home has at least 25 percent equity.