As published in Scotsman Guide's Residential Edition, September 2011.
If you have clients who bought their house using a Federal Housing Administration (FHA) loan, can they purchase another house using an FHA loan without selling their current home? Probably not — but there are exceptions.
Before we get into specifics, let's look at some reasons borrowers might need a second FHA mortgage:
They don't have the necessary credit score for a conventional loan.
They don't have enough cash for the downpayment required on a conventional loan.
They need gift funds from a family member to make a downpayment.
When any of these situations fits your borrowers, FHA financing might be their best option. But how can you qualify them for a second FHA loan when the guidelines only allow one FHA mortgage at a time?
It depends on the nuances of their situation. Each of the following circumstances may be allowable on a case-by-case basis. As you read the list, take note of how you can help borrowers make their argument.
Relocation: Borrowers must document an unreasonable travel distance from their existing home to work.
Increase in family size: Borrowers must prove their family size has increased beyond the capacity of their current home. They'll also need at least 25 percent equity in the current home.
Departing a jointly owned property: A common example of this occurs when your client is going through a divorce.
Non-occupying co-borrower: If your clients co-signed for a family member's FHA loan and don't live in the property, they could be eligible for an FHA mortgage of their own.
Helping your clients understand the exceptions and how to prove them is only part of the challenge. You also must help them qualify to carry both mortgages. Here are some of the ways you can do that, using three of the same exceptions noted above:
Relocation: This exclusion allows borrowers to rent their current property and count 85 percent of the monthly rent to offset their monthly mortgage payment. They'll be required to provide a one-year rental agreement, including a copy of the security deposit or a copy of the first month's rent check — or both.
Increase in family size: This exemption allows a current property to be rented with the same rules as relocation. In both cases, an appraisal must prove your clients have at least 25 percent equity in the initial home.
Departing a jointly owned property: Your clients may be exempt if their divorce decree grants the home and the mortgage to their ex-spouse or if they can prove that the person who will maintain occupancy has been making the payments from their own account — not a joint account — for at least the previous 12 months.
Non-occupying co-borrowers, mean-while, could be slightly easier to qualify if they're not responsible for making payments on the first FHA loan.
The bottom line is this: A second FHA loan could be the perfect option for the right clients. To make their case, however, you must lead them through the restrictive guidelines and explain nuances adequately to underwriters.
Also, every lender has its own interpretation of the guidelines, and just because FHA permits exceptions doesn't mean your lender will.
Rebekah Radice, mortgage loan originator with Benchmark Mortgage, is an active loan officer and mortgage-industry speaker. A self-proclaimed social media junkie and avid blogger, Radice has trained thousands of industry professionals on how to build and maintain their online marketing presence.
Radice has been profiled in national publications and recognized as an industry leader in the book Stilettos in a Loafer World: Mortgage Women Who Walk Their Talk. Reach her at (719) 761-1999, Rebekah@RebekahRadice.com or RebekahRadice.com.