January 18, 2013
A reader asks, “As a homeowner, can I purchase an investment property with a FHA loan?
FHA loans for single-family homes are designed for principal residences, which means the borrower must intend to live in the home as his or her primary residence.
FHA loan rules state, “To prevent circumvention of the restrictions on FHA-insured mortgages to investors, FHA generally will not insure more than one mortgage for any borrower (transactions in which an existing FHA mortgage is paid off and another FHA mortgage is acquired are acceptable). Any person individually or jointly owning a home covered by a mortgage insured by FHA in which ownership is maintained may not purchase another principal residence with FHA mortgage insurance except under the situations described below. Properties previously acquired as investment properties are not subject to these restrictions.”
The FHA loan rulebook, HUD 4155.1, states that a home cannot be purchased with an FHA guaranteed mortgage if, “FHA concludes that the transaction was designed to use FHA mortgage insurance as a vehicle for obtaining investment properties, even if the property to be encumbered will be the only one owned using FHA mortgage insurance.”
But the FHA does permit borrowers to apply for another FHA mortgage “if compatible with the homebuyer’s needs and resources as follows:
A. Relocations. If the borrower is relocating and re-establishing residency in another area not within reasonable commuting distance from the current principal residence, the borrower may obtain another mortgage using FHA insured financing and is not required to sell the existing property covered by a FHA-insured mortgage.”
“The relocation need not be employer mandated to qualify for this exception. Further, if the borrower returns to an area where he or she owns a property with an FHA-insured mortgage, it is not required that the borrower re-establish primary residency in that property in order to be eligible for another FHA insured mortgage.
B. Increase in Family Size. The borrower may be permitted to obtain another home with an FHA-insured mortgage if the number of legal dependents increases to the point that the present house no longer meets the family’s needs. The borrower must provide satisfactory evidence of the increase in dependents and the property’s failure to meet the family’s needs.”
“The borrower also must pay down the outstanding FHA mortgage (secondary liens do not need to be paid off or paid down) on the present property to a 75 percent or lower loan-to-value (LTV) ratio. A current residential appraisal must be used to determine LTV compliance. Tax assessments, market analyses by real estate brokers, etc., are not acceptable as proof of LTV compliance.”
There are other circumstances which may also permit multiple residence ownership–the FHA rules add provisions for borrowers who are vacating a jointly-owned property. The rules in this case state, “If the borrower is vacating a residence that will remain occupied by a co-borrower, the borrower is permitted to obtain another FHA-insured mortgage. Acceptable situations include instances of divorce, after which the vacating ex-spouse will purchase a new home, or one of the co-borrowers will vacate the existing property.”
And finally there are rules that allow a non-occupying co-borrower to apply for his or her own FHA mortgage. “A non-occupying co-borrower on property being purchased with an FHA-insured mortgage as a principal residence by other family members may have a joint interest in that property as well as in a principal residence of their own with a FHA-insured mortgage.”
In each of these situations, FHA warns borrowers, “Under no circumstances may investors use the exceptions described above to circumvent FHA’s ban on loans to private investors and acquire rental properties through purportedly purchasing ‘principal residences’.”
Do you have questions on how FHA home loans work? Ask us in the comments section.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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