FHA’s Obscure “100 Mile Rule” = Two Real Estate Commissions

In SoCal, approximately 30% of all homes 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 any other loan, who then, in turn, want to be become “move-up buyers” utilizing FHA financing.

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In practicality, the new rule forces those “move up” homeowners to sell their current residence instead of converting it into a rental.

The Rule Simply States:

Homeowners.. who currently have a 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 FHA loan for a principal residence.

For example, The Jones family currently lives in Long Beach (123 Main St.) in a home that’s secured by a (any type) loan.  

And they want to buy a “move up” home in Huntington Beach (and rent out their Long Beach home) and use that rental income (from the Long Beach property) to help qualify to buy the (move up) Huntington Beach home with FHA financing.

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But they are not relocating more than 100 miles away from their current residence, so the Jones are required to qualify for the NEW mortgage, with no offsetting rental income from their current Long Beach home, (which is very unlikely).

OR,

they must sell the Long Beach home. That’s the rule and you take that (literally) to the bank. Both commission checks

The “100 Mile Rental Rule”

So, when talking with sellers who wish to convert their current residence into a rental property, use an FHA loan (and purchase the next residence) simply ask “is your current residence secured by ANY mortgage”.

Then wait for the “good news”; as this obscure rule change… gives agents the opportunity for a listing AND selling commission!

Note: Just get the listing contract signed and then contact your loan officer.

Better to let the MLO be the “explainer” of bad news, rather than you.

If the clients wish to move forward you have two commission checks; if they don’t move forward; you have not wasted any substantial amount of time and then proceed directly to the beach, uncork the wine knowing full well your competition is wasting their time and gas on a deal that can’t / won’t close!

Other Obscure FHA Lending Tips

FHA loans cannot be used for 2nd home financing or for investment (non-owner occupied) property. Borrowers can only have 1 FHA loan at any 1 time.

FHA loans are much easier to qualify for with higher debt ratios and lower credit scores (vs. Fannie/Freddie loans). FHA (and VA loans) will go as low as 580 Ficos (vs. 620 for Fannie/Freddie)

For FHA loans, the max. “front end” debt to income ratio (DTI) is 47%, (vs. 42% for Fannie/Freddie loans); the max. “back end” debt to income ratio (DTI) is 64.9% (vs. 43% for Fannie/Freddie loans).

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).

FHA is much more lenient for using a “co-signer” to purchase a home.

FHA (virtually) always requires a termite clearance before COE (vs. Fannie and Freddie it’s 50/50).

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