How Many FHA Loans Can You Have?
FHA loans are an excellent option for homebuyers, offering low down payments and flexible credit requirements. However, it's important to remember that these loans are primarily intended for purchasing a primary residence. But what happens when life circumstances change and you need a second home loan? Is it possible to obtain more than one FHA loan?
In this article, we explore the scenarios where you might qualify for a second FHA loan, the challenges involved, and the alternatives available if your situation doesn’t fit FHA guidelines.
Highlights:
- One FHA Loan Rule: Generally, FHA loans are limited to one per borrower, as they are intended for primary residences.
- Exceptions for Multiple Loans: You may qualify for a second FHA loan if you are relocating over 100 miles, expanding your family, separating from a co-borrower, or acting as a non-occupying co-borrower.
- Qualifying Challenges: Securing additional FHA loans can be difficult due to strict debt-to-income (DTI) ratio requirements and limitations on using rental income for qualification.
- Alternative Financing Options: If FHA guidelines don't apply, consider using a conventional loan, refinancing your existing FHA loan, or selling your current property.
- Careful Planning Required: Ensure you understand your financial obligations and explore all options before pursuing multiple FHA loans.
How To Get Two FHA Loans
First, it’s important to remember that, in general, you can only have one FHA loan. However, four situations make having two or more FHA loans acceptable to FHA.
FHA loans are intended for primary residences only. So, in each of these situations, the new home you’re purchasing must become your primary residence while the original home becomes a vacation home, rental property, etc.
1. Relocation (100 mile rule)
You can get a second FHA loan if you have to move for work or other legitimate reasons. The lender will allow you to buy with FHA without selling your current home.
Your new primary residence must be at least 100 miles from the current home.
For example, you have an FHA loan on your home in Denver, Colorado, but since you relocate for work to Albuquerque, New Mexico, over 400 miles away, you can get another FHA loan.
However, if you moved to Colorado Springs, just 70 miles away, you could not get another FHA loan without selling the current residence. Though, you could try for a conventional loan or another loan type.
2. Increase in Family Size
In some cases, families who have outgrown their current residence can get another FHA loan without moving 100 miles away. You must have more legal dependents than when you purchased the home.
For instance, you purchased a two-bedroom house when you had one child. You had another biological child and adopted another. You could make the case that a family of five is too large for a two-bedroom.
However, not everyone will be eligible. You must have at least 25% equity in your current home, meaning the FHA loan has only 75% of the home’s current value. You must prove the home’s value with a new appraisal.
Because most people put just 3.5% down for FHA, it’s unlikely that you would have 25% equity unless you lived there for a long time.
3. One Borrower Permanently Moves Out
If two people, such as a husband and wife, purchase a home together and then get divorced, the vacating spouse can use an FHA loan to purchase another home. However, the situation is a bit nuanced when it comes to the original mortgage. Ideally, the remaining spouse would refinance the mortgage to remove the vacating spouse’s name, freeing them from any financial obligation on the original loan.
But what if refinancing hasn’t happened yet? The vacating spouse can still apply for a second FHA loan before the remaining spouse refinances, as long as there is a clear intention and agreement that the remaining spouse will refinance the mortgage to remove the vacating spouse’s name. Lenders typically want documentation verifying that the vacating spouse is no longer responsible for the original mortgage or that steps are being taken to finalize the refinancing process.
It’s important to remember that until the refinancing is complete, the vacating spouse technically still has financial responsibility for the first mortgage. This could impact their debt-to-income (DTI) ratio and the qualification process for the second FHA loan. Therefore, timing and clear communication with the lender are crucial to ensure everything aligns properly.
This scenario doesn’t just apply to divorce. If a boyfriend and girlfriend, or even two friends, buy a home together and one decides to move out permanently, the same process applies. The vacating person can seek a new FHA loan, but the remaining person would typically need to refinance the existing mortgage to remove the vacating person’s name and finalize the separation of financial responsibilities.
4. Non-Occupying Co-Borrowers
If you helped someone purchase a home as a non-occupying co-borrower, you can purchase your own house and live in it with FHA.
Additionally, you can be a non-occupying co-borrower for someone else, even if you currently have an FHA loan.
Keep in mind that in both circumstances, you must qualify for the new loan, considering the current FHA loan payment.
Can You Have More Than Two FHA Loans?
In theory, you could have more than two FHA loans. If you keep relocating more than 100 miles away, you could keep buying homes using FHA.
Eventually, though, it will be hard to qualify for a new loan. You can’t always use rental income from your former residence to qualify for the new house.
But if your income is high enough, you could technically have three or more FHA loans.
However, if it appears you’re using FHA to amass rental property, the underwriter can deny the loan. If you show a pattern of moving over 100 miles away every couple of years, buying a house with FHA every time, expect more scrutiny from the lender.
Qualifying for More Than One FHA Loan
The qualification process for additional FHA loans will largely mirror what you went through with your first FHA loan. This means you’ll need to meet the standard FHA requirements, including:
- Credit Score: A minimum credit score of 580 for maximum financing (3.5% down payment) or a score of at least 500 for loans requiring a 10% down payment.
- Income: Sufficient income to cover both mortgage payments while maintaining a debt-to-income (DTI) ratio within FHA guidelines, typically not exceeding 43%.
- Down Payment: A minimum down payment of 3.5% of the purchase price, depending on your credit score.
- Property Requirements: The new property must meet FHA’s minimum property standards and be intended as your primary residence.
However, there are some additional considerations since you’ll now manage two mortgages.
One of the most significant factors is your debt-to-income (DTI) ratio. FHA guidelines typically require your DTI ratio to be no higher than 43%, though some lenders might allow up to 50% with compensating factors. When applying for a second FHA loan, both your existing and new mortgage payments will be factored into your DTI ratio. This can make qualifying more challenging, especially if your income hasn’t increased substantially since your first FHA loan.
Rental Income Considerations
If you plan to rent out your first property, you might wonder if the rental income can be counted towards your DTI for the second home. The good news is that FHA guidelines do allow including rental income when calculating your DTI, but there are a few caveats:
- Proof of Rental Income: To count the income, you must provide evidence of an active rental agreement. Lenders typically require a signed lease agreement and, in some cases, proof of rent deposits into your bank account over the past 12 months.
- Vacancy Factor: Lenders might apply a "vacancy factor," typically reducing the rental income by 25% to account for potential vacancy periods. This adjusted amount is then used in your DTI calculation.
- Equity Requirements: If you use rental income from your first home to qualify for the second FHA loan, the first property generally needs a minimum of 25% equity. This ensures you aren’t over-leveraging yourself and can handle both mortgage payments.
It’s important to understand that while rental income can help you qualify for a second FHA loan, you must carefully consider the additional burden of managing two properties and two mortgages. Ensure that your income is stable and that you’re prepared for the responsibilities of being both a homeowner and a landlord.
Alternatives To Getting Two FHA Loans
If your scenario doesn’t match FHA guidelines, you still have options.
- Buy the new home with a conventional loan: You can have as many mortgages as you’d like, as long as they are not FHA. You could purchase the new home with a conventional, non-QM, VA, or another type of loan.
- Refinance the current home to a conventional loan: You could refinance the current home into another loan type, such as a conventional loan. Then, you could keep the house and buy again with FHA, regardless of location.
- Sell the current home: If you’re out of options, you could sell the home and pay off the existing FHA loan. Then, you would have no restrictions on buying again with FHA.
Know Your Options
If you’re looking at a tough scenario, there are plenty of creative financing options out there. Know all your options before giving up on your ideal financing structure and home.
Here are some additional articles that may help you in your journey to buy your next home:
What Is the Main Difference Between FHA and Conventional Loans?
How To Buy a Duplex, Triplex, or Fourplex With an FHA Loan
FHA Home Loan Mortgage Calculator - Estimate Your Monthly Mortgage Payments
