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What You Need To Know About The FHA 100 Mile Rule
With affordability out of reach for many in Southern California, FHA loans offer people a way into homeownership without a conventional 20 percent down. Because of this, approximately 30 percent of all homes in Southern California are secured by an FHA mortgage. In 2017, FHA made an obscure change in their underwriting criteria for determining how rental income is calculated for homeowners with an FHA loan who then, in turn, want to be become "move up buyers". In practicality, the new rule forces those “move up” homeowners to sell their current residence instead of converting it into a rental.
The "100 Mile Rule" simply states that homeowners who currently have an FHA loan for their primary residence must relocate 100(+) miles from the current (soon to be rental) property in order to use rental income (from their current residence) to qualify for their next principal residence. If they are relocating less than 100 miles, the buyer is required to qualify for both mortgages, with no offsetting rental income for their current home, (which is very unlikely).
What else should you know about FHA Loans?
1. FHA loans cannot be used for 2nd home financing or for investment (non-owner occupied) property.
2. Borrowers can only have 1 FHA loan at any 1 time.
4. FHA (and VA loans) will go as low as 580 Ficos (vs. 620 for Fannie/Freddie)
5. For FHA loans, the maximum “front end” debt to income ratio (DTI) is 47%, (vs. 42% for Fannie/Freddie loans); the maximum “back end” maximum debt to income ratio (DTI) is 64.9% (vs. 43% for Fannie/Freddie loans).
6. Borrower’s down payment can be all gift money (vs 5% of the purchase price must come directly from the buyer’s own funds for Fannie / Freddie).
7. FHA is much more lenient for using a “co signer” to purchase a home.
8. FHA (virtually) always require a termite clearance before COE (vs. Fannie and Freddie it's 50/50).
If you're considering buying a home, but feel the down payment may be an obstacle, talk with a lender about FHA loans. They will give you the pros and cons and can open your eyes to available programs you were entirely unaware of!
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