When it comes to investing, many Americans turn to real estate as an alternative to the stock market. However, real estate investment typically requires more capital.
While this may dissuade some from entering the housing market, high costs don’t always have to prevent investors from real estate.
What is an FHA loan?
An FHA Loan is a specific kind of housing loan that is insured by the Federal Housing Administration. This means that the FHA will pay for your loan if you become insolvent. Because of this, you can obtain a loan for a house paying as little as 3.5% of the price in the down payment. While you will have less equity in the home, this significantly lowers the amount of money you need to purchase a home.
With an FHA loan, you would have to pay an additional monthly insurance premium to the FHA for insuring your loan.
Investing with an FHA loan
An FHA loan also requires you to live in the home for at least a year. However, investors can use the loan to purchase a multi-family housing unit. While you would have to occupy one of the units, you could rent out the other units of the property.
Benefits of an FHA loan
An FHA loan is attractive to first-time investors because it allows them to:
- Purchase a home with less capital: With a down payment requirement that can be as low as 3.5 %, an FHA loan allows people who don’t have a lot of liquid assets to purchase a home.
- Live where they rent: If managed well, an investor can live rent free in a property that they also rent out to others.
Limits of an FHA loan
There are also limits to consider with an FHA loan. For example, there is a set cap on how much you can obtain through an FHA loan. This cap is based on the prices of homes in your area.
Furthermore, though you may only have to pay 3.5% down, this also means that you may be starting with less equity on the property.
Is the FHA loan right for me?
Investing in real estate is a big decision that requires a lot of consideration. While an FHA might be an attractive option for first-time investors, you should do your due diligence before making any final decisions on an investment.