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 its underwriting criteria for determining rental income for homeowners with any other loan who then want to become “move-up buyers” utilizing FHA financing.

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In practicality, the new rule forces “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 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.  

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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However, they are not relocating more than 100 miles from their current residence, so the Jones must 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), ask, “Does ANY mortgage secure your current residence?”?

Then wait for the “good news”: This obscure rule change gives agents the opportunity for a listing AND selling commission!

Note: GSign the listing contract and then contact your loan officer.

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. Then proceed directly to the beach and uncork the wine, knowing your competition wastes time and gas on a deal that can’t / won’t close!

Other Obscure FHA Lending Tips

FHA loans cannot be used for second home financing or for investment (non-owner-occupied) property. Borrowers can only have one FHA loan at a 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).

The borrower’s down payment can be all gift money (vs. 5% of the purchase price, which must come directly from the buyer’s funds for Fannie / Freddie).

FHA is much more lenient when 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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