I'm making it easier for everyone to understand how the mortgage process works! As part of my brand new "Ask the Underwriter" feature, I'll be posting your questions and my answers each week. Want to see your question featured? Submit a question in the comments section of this post, tweet at us, or post on Reddit.
I am getting married, my fiancé and I both have children, and we need a larger home to make room for everyone. Can we use FHA financing to buy the new home for our family if I already have an FHA loan on my current house? I have paid off almost half of the mortgage on my house, and I would like to keep it and use it as a rental or second home. But I have been told I would have to refinance it into a conventional loan or we would not be able to get an FHA loan for the purchase of our new home. Is this true? Can you only have one FHA loan at a time?
FHA is super strict when it comes to letting a borrower have more than one current FHA loan. Typically, the answer is no. But in your case, the answer just might be yes!
Listed below are the only circumstances in which a borrower with an existing FHA-insured mortgage for a principal residence may obtain an additional FHA-insured mortgage on a new principal residence:
RELOCATION - A borrower may be eligible to obtain another FHA-insured mortgage without being required to sell an existing property covered by an FHA-insured mortgage if the borrower is:
- Relocating or has relocated for an employment-related reason; and
- Establishing or has established a new principal residence in an area more than 100 miles from the borrower’s current principal residence.
If the borrower moves back to the original area, the borrower is not required to live in the original house and may obtain a new FHA-insured mortgage on a new principal residence provided the relocation meets the two requirements above.
INCREASE IN FAMILY SIZE - A borrower may be eligible for another house with an FHA-insured mortgage if the borrower provides satisfactory evidence that:
- The borrower has had an increase in legal dependents and the property now fails to meet family needs; and
- The Loan-to-Value (LTV) ratio on the current principal residence is equal to or less than 75% or is paid down to that amount, based on the outstanding mortgage balance and a current residential appraisal.
VACATING A JOINTLY-OWNED PROPERTY - A borrower may be eligible for another FHA-insured mortgage if the borrower is vacating (with no intent to return) the principal residence which will remain occupied by an existing co-borrower.
NON-OCCUPYING CO-BORROWER - A non-occupying co-borrower on an existing FHA-insured mortgage may qualify for an FHA-insured mortgage on a new property to be their own principal residence.
Your situation should qualify as in increase in family size. You definitely meet the first requirement regarding additional dependents. And, if you have paid off almost half of your mortgage on your current home, you should also meet the second requirement of having a loan to value of 75% or less on your current home. You will need to have an appraisal done on your current home to determine its current value. You will take the balance owed on your FHA Mortgage and divide that number by the appraised value of your home and then multiply the result by 100…it seems like a weird complicated calculation, but it's not. Here’s what it looks like on paper:
Mortgage Balance: 125,000 /
Appraised Value: 230,000
= .5434 x 100
Loan to Value: 54.34%
As long as your LTV is 75% or less, you can get a second FHA loan!