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February 28, 2020
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Real Estate & Business

Scott Sheldon
How the FHA 100-mile rules your ability to rent or buy
January 3, 2020

FHA Loans are one of the most flexible loan programs available in the US housing market today. They are incredibly flexible, only require a 3.5 percent down payment and offers very makes sense underwriting. If you’re looking at an FHA loan, however, and you already own a house and you’re desiring to borrow money to buy another house. This FHA guideline may come back to bite you…

The FHA insures loans, but does not guarantee loans. The FHA insures the lender in the event you do not make your mortgage payment. The FHA is probably the second most popular form of residential mortgages in America with the first being conventional mortgages. The FHA, while incredibly flexible, is very sensitive to rental income situations…

Here is the granddaddy problem with FHA Loans and rental property.

Let’s say you currently have a house regardless of what type of loan you have on that house. You are looking to go buy a new primary home and you’re going to use rental income to qualify by renting out your old home. Makes logical sense right? The departure residence would get converted from primary home to rental property home. Not so fast. Here’s where things can become problematic. The FHA has a requirement that specifically states the new primary residence must be 100 miles away from the old departure residence. This means you cannot keep your house and then turn around and buy another one a few miles away using an FHA Loan for the acquisition of the new primary home. The two properties need to be 100 miles away from each other.

In such a scenario you would be much better off going with 3 percent or 5 percent down conventional loan to acquire a new primary home as the conventional financing does not have a 100-mile distance requirement. Keep this in mind when you’re figuring out what you want to do with that property. In some cases, it might make sense to change loan programs or potentially even sell the departure property because if you sell the departure property you will have more down payment moneys, lowering your monthly housing expense for the new purchase.  It could help you from having private mortgage insurance which is a requirement of FHA Loans. This is something to think about when determining what type of loan program and loan structure makes the most sense for you.

This is also precisely why it always is generally a good rule of thumb to work with an experienced lender specifically familiar with the intricate details of FHA and conventional loans. Hint: that’s not an online blender promising you a rocket experience.

 

Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.