FHA 100 Mile Rule - Can I Get Around It?

3 Replies

My friend has found a deal on a two family in his town in Hull, MA and has it locked up at great price, probably $20k under FMV. He currently lives in a single family with his wife in the same town, but they are planning to rent the single family and house hack the two-family.

He was planning to use the FHA loan for the two family, but he can't have two properties within 100 miles if he is using rental income of one to support the second loan.

Would it work if he didn't include the rental income of his single family and had a cosigner with better income to help qualify for the loan on the two family? 

Unlikely; one of the exceptions in owing two FHA homes is purchasing a larger home due to a growing family (kids, aging parents, etc.) Going from a SFH to a duplex will signal to the underwriter (correctly) that his intent is to utilize the FHA home as an opportunity to "house hack." There are other low down payment loan types that may work for him, such as 5% down conventional.

While FHA is "only" 3.5% down payment, there's a 1.75% funding fee, making your cash out of pocket up front 5.25% - ignoring closing costs - whereas a 5% down conventional is cheaper upfront, lower MI, and that MI goes away eventually.

Originally posted by @Michael Cohen :

Unlikely; one of the exceptions in owing two FHA homes is purchasing a larger home due to a growing family (kids, aging parents, etc.) Going from a SFH to a duplex will signal to the underwriter (correctly) that his intent is to utilize the FHA home as an opportunity to "house hack." There are other low down payment loan types that may work for him, such as 5% down conventional.

While FHA is "only" 3.5% down payment, there's a 1.75% funding fee, making your cash out of pocket up front 5.25% - ignoring closing costs - whereas a 5% down conventional is cheaper upfront, lower MI, and that MI goes away eventually.

The 1.75% upfront MIP for FHA is true however this is typically financed so the down payment is still in fact 3.5% down out of pocket (plus closing costs of course assuming no other credits from seller, agents, or lender).

5% down conventional is extremely limited now as of July 28th 2019 Home possible (freddie) and Home ready conventional programs (Fannie) can only be used when your qualifying income on a file is at 80% of AMI (area median income) or lower which is tough in higher cost areas where the borrower may enter a chicken or the egg scenario. This happens because you need the lower 80% of AMI or lower income to meet program requirements but the price is so high in your local area that you need "higher," income to qualify and ultimately you can cant get the home with your intended program.


 

Originally posted by @Bob D. :

My friend has found a deal on a two family in his town in Hull, MA and has it locked up at great price, probably $20k under FMV. He currently lives in a single family with his wife in the same town, but they are planning to rent the single family and house hack the two-family.

He was planning to use the FHA loan for the two family, but he can't have two properties within 100 miles if he is using rental income of one to support the second loan.

Would it work if he didn't include the rental income of his single family and had a cosigner with better income to help qualify for the loan on the two family? 

 HI Bob,

The 100+ mile rules applies to situations when you're leaving (fha calls it vacating) a residence you own or live in current and are using FHA financing to purchase that new home with their 3.5% low down payment (96.50% LTV same difference as 3.5% down).

The reason they have this rule is they want to make sure you're not over leveraging your income (maxing yourself out) to purchase using their program. FHA is ultimately insuring a large portion of the risk of these loans and this rule is designed to reduce the risk on their insured loan portfolio.

How to work around this?

1) the borrower can just qualify for both homes (the one being vacated with out rental income and the new purchase) but the downside of this is you need a borrower with really high income to meet both

2) the borrower can use a conventional loan program to purchase the new property as fannie or freddie conventional financing does not have a 100+ mile rule to use rental income offset. There are some limitations with this option because regular conv guidelines requires 15% down as primary on 2 unit properties and 20-25% down on 3-4 unit properties, and as little as 5% down on 1 unit properties. There is another niche conventional program that requires 5% down for 1-4 units but its income restricted and the borrower would need to make 80% of area median income (AMI) limit or less and these programs are called home ready and home possible.

3) the borrower can move out of the current primary home and rent an apartment, live for free at a relatives place, live at a friends home, or parents home for a min of 6+ months prior to applying for FHA since the borrower is no longer vacating a primary in this instance. This takes planning ahead of time.

4) if the borrower is a veteran they can use VA financing as VA does not have a 100+ mile rule either to purchase another primary residence for using rental income offset on the vacating home.

5) the borrower can also qualify for both homes but on the new purchase they can bring in a co-borrower that will be an occupant in the new home. The advantage of the occupant borrower is that they will limit our financing on the new purchase. The borrower can also bring in a non occupant coborrower, but this is where the limitations enter, on 2-4 unit properties the down payment increases from 3.5% down to 25% down however this does not apply if all borrowers were occupant borrowers. So the non occupant coborrower works best when the borrower is purchasing a new 1 unit property as opposed to 2-4 unit property with FHA upon vacating the prior.

Hope that helps, let me know if you have any questions. 

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