Did you think that FHA loans are just for first time home buyers? What if you used FHA before, are you done with FHA? Even further, what if you still have that FHA loan and want another? Maybe even count new rental income on the departing residence too. For many scenarios, the general FHA guideline is that borrowers may only have one FHA loan at a time. But, there are exceptions to this rule! One such exception is for someone relocating and buying another primary residence. This FHA exception is called the FHA 100 mile rule. Obviously, a buyer would need to relocate at least 100 miles from the former residence which has the FHA loan. But, there are more details to understand which could make it easier to buy that next primary residence.
Benefits of FHA Loan
So, what’s the big deal with getting an FHA loan? Much less, a second FHA loan? Well, FHA loans are a very popular choice for many reasons. Mainly, buyers benefit from flexible underwriting guidelines as well as the loan terms.
10 First Time and Repeat Buyer Benefits of FHA Loan
- Low down payment
- Down payment assistance allowed
- Low credit scores allowed
- Previous bankruptcies, foreclosures, & short sales allowed
- Gift of equity for family purchase transactions
- Higher debt ratios
- Co-signors that will not occupy the home
- Gifted funds for down payment
- Renovation options for buyers or homeowners
- Doublewide Purchase
Plus, do not forget that buyers who used FHA for some of the above benefits could use it again for the same reasons.
Job Relocation and FHA 100 Mile Rule
Changing jobs is much more common today. Sometimes by choice, other times by necessity. But, when it comes to using the FHA 100 Mile Rule exception, the job relocation must be at least 100 miles. Using this rule allows a buyer to retain the FHA loan on the prior residence. Additionally, the buyer may use FHA again.
FHA 100 Mile Rule – Buyers Must Meet Both of These Requirements
In order to obtain another FHA mortgage without selling the other home, the buyer must be…
- Relocating or has relocated for an employment-related reason
- Establishing or has established a new primary residence greater than 100 miles from the prior residence
Just satisfying one of the above will not work.
Furthermore, military service members receive an occupancy exception. In order to document the exception, the service member must provide the military orders. It proves the active duty status plus if the duty station is over 100 miles from the new property..
Using FHA 100 Mile Rule to Count Rental Income
Moving from residence to another within 100 miles requires a buyer to qualify on both mortgage payments. Even if the prior residence is being rented out, the rental income may not be counted when using an FHA loan on the new home. That means an FHA lender must use the principal, interest, mortgage insurance, property taxes, and insurance for both the rental property and the new home in the buyer’s debt to income ratio. For most buyers, that a tough way to qualify.
But, if an FHA buyer meets both qualifications mentioned above then a portion of the rental income may be used to qualify.
Departure Residence Rental Income: Using rental income from a property being vacated by the borrower: If rental Income is being derived from the property being vacated by the borrower, the borrower must be relocating to an area more than 100 miles from the borrower’s current principal residence.
If the Borrower moves back to the original area, the Borrower is not required to live in the original house and may obtain a new FHA-insured Mortgage on a new Principal Residence provided the relocation meets the two requirements above.
What If I Can’t Meet the FHA 100 Mile Rule?
Luckily, there are additional solutions within the FHA loan as well as other loan options. As mentioned above, it is hard for a buyer to qualify using two full housing payments. One possible option includes adding a co borrower. More specifically, a non occupying co borrower, which means that this co borrower does not have to live in the house. This borrower may just be used to help the occupying buyer qualify. Keep in mind, the co borrower is on the hook for the loan just as much as the primary borrower.
Fannie Mae Loan Allows Rental Income on Departing Residence
Many buyers, lenders, and Realtors put their blinders on by thinking FHA is the only low down payment purchase loan. Actually, Fannie Mae offers the HomeReady loan which only requires 3% down payment. Plus a buyer may use the traditional Fannie Mae conventional loans which only require 5% down or more. Any of these options allow for the down payment to be a gift and debt ratio may go up to 50% of a borrower’s income. Buyers with good credit scores often come out better on monthly payment because the PMI is cheaper.
But, the big advantage to point out in this case is using rental income. Fannie Mae has several advantages in this area. First, there is not a distance requirement to count rental income. Although, it does require a one year signed lease, copy of first month’s deposit or rent check, and proof of deposit into the owner’s account. Then, a buyer may count 75% of the rental income on the departing residence. Basically, the effect looks like this: Gross Rent x 75% = Net Rent – Mortgage Payment Including Taxes, Insurance, and PMI. Let’s assume $1000 rent and $800 total mortgage payment. Using the formula above, here is the affect on a debt to income ratio. $1000 x 75% = $750. $750 – $800 = – $50.
A $50 loss is a whole lot easier to qualify with compared to using the entire $800 required on most FHA loans!