Loan Modification

Can you rent current home & buy replacement home with FHA?

By Peter G. Miller

There are a large number of markets where selling a home is likely to lead to a real loss. The latest numbers from RealtyTrac show that more homes received foreclosure notices in 2010 than ever before — some 2.9 million.

These properties, however, were not spread out uniformly across the country. RealtyTrac says “five states accounted for 51 percent of the nation?s total foreclosure activity in 2010: California, Florida, Arizona, Illinois and Michigan. Together these five states documented nearly 1.5 million properties receiving a foreclosure filing during the year despite annual decreases in the three states with the most foreclosure activity.”

The large number of owners facing foreclosure — and the concentration of homes in the major foreclosure states — raising the idea that perhaps selling is not a reasonable option. Instead, the alternative might be to rent the current property and buy elsewhere.

In terms of an FHA loan the idea of renting and then buying is possible — but not so easy.

In 2008 HUD wrote that the “FHA and others in the mortgage industry have observed an increasing number of homeowners who have chosen to vacate their existing principal residence and purchase a new residence. This has been occurring as some homeowners, given the rising price of fuel, are relocating to homes nearer their employment, or are taking advantage of other home buying opportunities arising in the marketplace.

“Due to FHA?s concern that some homebuyers in these transactions may attempt to provide misleading information regarding the rental income of the property being vacated to qualify for the new mortgage, FHA is instituting underwriting guidance designed to assure that the homebuyer can make payments on the full debt service of both mortgages.”

Requirements

It turns out that the FHA guidelines from 2008 are fairly straight-forward. If you want to rent your current property, buy a replacement home and finance the replacement property with an FHA home loan, then several basic standards must be met:

First, a new home with FHA financing might be acceptable if the new property was need because the owner has relocated and commuting from the old home is no longer practical.

Second, HUD wants FHA lenders to assure that the original house is actually rented. A one-year lease, security deposit and evidence that the first month’s rent was paid all help. One question here is when do you need a lease — it’s terribly difficult to time the purchase of a new home and the rental of an existing property so that an owner does no rent out the first house, have no place to live, and then must look for a replacement home.

Third, you have to have equity in house #1 — at least 25 percent. If a house has a fair market value of $400,000 the existing loan cannot have a balance of more than $300,000.

For specifics, speak with an FHA-approved lender — and be sure to ask about all requirements and deadlines.

Full post as published by FHA Mortgage Guide on January 17, 2011 (boomark / email).