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Don't let the FHA 100 Mile rule break your plans

Updated: 12 hours ago

FHA Loans are some of the most flexible loans available in the market today. They only require a 3.5% down payment and have common sense underwriting. However, if you are looking at an FHA loan and you already own a house and your desiring to borrow money to buy another house. This FHA guideline may come back to bite you…

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FHA insures loans, but does not guarantee them. Instead the FHA insures the lender in the event you do not make your mortgage payment. This insurance allows lenders to take a sense of risk they would not normally have taken on loans. FHA loans are the second most popular form of residential mortgages in America with the first being Conventional mortgages. While FHA is incredibly flexible with it's common sense underwriting and government backed insurance it is very sensitive to rental income situations in certain instances.

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Here is the problem with FHA Loans and rental property

If you currently have a house, regardless of what type of loan you have on that house and you are looking to purchase a new primary residence. You need to be aware of the restrictions imposed on your income, particularly your rental income used to qualify.

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If you are planning on converting your departure

residence into a source for rental income. You will need to ensure you are choosing the correct loan type if your two homes are within 100 miles of each other. FHA loans come with restrictions or extra rules that you need to consider and this is were 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. If the properties are not 100 miles away from each other then you will not be able to count the rental income for the departing residence. Hence you would have to qualify with the additional debt of the departing residence monthly payment.

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In such a scenario you would be much better off going with 5% down Conventional Loan to acquire a new primary home as the conventional financing does not have a 100-mile distance requirement. This would allow you to offset your departing residence monthly payment with up to 75% of the monthly rental income. Keep this in mind when you’re figuring out what you want to do with your home.

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Can you switch Loan Programs?

In some cases, it might make sense to change loan programs or potentially even sell the departure property. Of course every ones situation is different and you will need to choose what is best for you. If you were to choose to sell your departing residence, then you could possible place a larger down payment on your new home and avoid the 100 mile FHA rule or switch to a conventional loan and possibly not have to pay a monthly mortgage insurance premium. These are things to consider when deciding 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 lender.

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