FHA Loan On Property that already has leases

10 Replies

My girlfriend and I are going to use an FHA first-time home buyer loan to purchase a duplex. My question is that if you need to live in an FHA loaned property, but it's already tented with leases through the next year, can one still purchase this property w/ FHA first-time home buyer financing? Does this nullify a lease or what? I don't want to kick somebody out who is paying their rent.

To my knowledge, and in PA, you have to honor the lease.  Not the answer you're looking for, however you could look at purchasing as an investor if its a sound investment that way too.

Also, without getting too involved, make sure you AND your girlfriend know its a business.

I had this concern when we bought a duplex using a VA loan about two years ago. If I remember correctly, you can end a tenants lease with either 30 or 60 days notice if you buy a property and intend to/need to owner occupy. That was true in Kansas, but I'm not sure about every state.

Hello Matthew!

In order to receive an FHA loan, the owner must occupy. If the duplex is fully rented, I'm afraid that duplex is not an option for you. I am in MN and this is true for my state. I am going through something similar right now.

However, you can look into 'buying out' one or both of the tenants from their leases. Not sure if that's attractive to you or not.

Check with your lender on how soon you have to move in for the FHA loan.

Do you need to move soon?  If you do, you probably need to look for another property.

If you can wait, there are a couple options.  One is to do a closing close to the time the earliest lease terminates.  This is a great timeline for the seller, since he will have the place fully rented until closing.  I would expect a small discount on the price for this approach.  The big risk to you is an increase in interest rates that make the mortgage more expensive.  The upside for you would be it might give you time to get a bigger down payment.

Another option would be to stick with a price and have the owner take care of terminating the lease.  This should shorten the time frame to closing, but it will likely be a while.

Is owner financing a possibility? A balloon could be relatively short, since you should be able to at least FHA finance once you can move in. If you get a good appraisal, you may even be able to do conventional financing if it has "seasoned".

Okay. So I see what our options are. I suppose it's just going to be something that I have to work out with the seller beforehand whether it be a delayed closing, buying a tenant out of the lease, or having the owner terminate the lease and waiting. 

The mortgage broker (Frank Acevedo, Prime Lending) that we're using said that the bank may reject it since it's an investment property if there's currently a tenant.

My Realtor says normally the seller just buys out the tenant's lease.

We're going to look at Monday and see if it's actually something we'd want haha.

@Matthew Maggy

Yes. You will have to occupy one of the units, and typically honor the leases or hope the landlord has them on a monthly lease. You can always ask the seller to buy the tenant out of the lease..... Since the seller is the one that decided to sell the property with a year lease. Any owner occupied investor will run into this issue as well.

Here is some info on FHA financing.

http://www.biggerpockets.com/blogs/5110/blog_posts/43989-house-hacking-with-an-fha-mortgage---some-basics

Thanks for the link. We're investment hunting today.

Originally posted by @Matthew Maggy :

My girlfriend and I are going to use an FHA first-time home buyer loan to purchase a duplex. My question is that if you need to live in an FHA loaned property, but it's already tented with leases through the next year, can one still purchase this property w/ FHA first-time home buyer financing? Does this nullify a lease or what? I don't want to kick somebody out who is paying their rent.

Yes you will need to prove that the primary occupant (most notably you and/or your spouse) will be able to move in in order to do a FHA loan as a primary occupant.

I've had to have the appraiser come back out to verify that the tenant has vacated so the borrower can move in or is able to move in as per the loan conditions.

This would be the same for VA, FHA, Conventional when qualifying as a primary occupant.

Originally posted by @Matthew Maggy :

Thanks for the link. We're investment hunting today.

 Maybe some cash for keys ? help move the tenant out and check to see if the leases are m2m or if they are still within their contractual limits.

Originally posted by @Albert Bui :
Originally posted by @Matthew Maggy:

Thanks for the link. We're investment hunting today.

 Maybe some cash for keys ? help move the tenant out and check to see if the leases are m2m or if they are still within their contractual limits.

 So I could just have an appraiser come and verify that tenants moved out? That's a great idea. I'll have to see what my mortgage guy says about that.

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