The Federal Housing Administration is very clear in the role they play in the housing market. They want to promote homeownership for borrowers who do not “fit in the box” by traditional lending standards — in other words, those who don’t have a high credit score, large down payment or low debt-to-income ratio. The FHA helps support the housing market by offering an alternative-financing vehicle to homeowners who have little home equity. So what can a consumer do if he or she wants to obtain an FHA loan on an investment property?
If you talk to any mortgage lender about FHA financing, they will tell you it’s for a primary residence only. However, there are two exceptions to the rule:
1. Rental Property: This scenario will pass any litmus test. Say the house was purchased and the owner lived in it for a year. Then, the homeowner purchased a different primary home, moved into that property, and has been renting out the first home ever since. As long as the property used to be your primary residence and the loan is an FHA-insured mortgage, you can refinance the original property using an FHA loan.
2. Second Home: Similar to the above exception, say a property was purchased as a primary home and lived in for some time, and the loan on the property is an FHA-insured loan. Since living in the property, the consumer purchased and moved into a new primary residence and has turned the original home into a second home/vacation property that they visit a few times during the year.
In either case, the property needs to be a previous primary residence and have a current FHA loan tied to that property. In such a scenario, a consumer can also refinance that loan under the FHA Streamline Refinance Program. While a payment-reduction refinance is an acceptable option for this scenario, cashing out wouldn’t be allowed.
Watch Out for Current FHA Mortgage Insurance Premiums
Consumers should know that, in recent years, the FHA has increased the mortgage insurance premiums, which can make an FHA Streamline Refinance less attractive as the mortgage insurance premiums are now substantially higher.
FHA charges an upfront mortgage insurance premium of 1.75% of the loan amount, amortized over the term of the loan. An additional monthly mortgage insurance premium is based at an annual rate of 1.35% of the base loan amount (that is, the amount prior to the financing of the upfront mortgage insurance premium).
So let’s say you take out a loan for $400,000. With the upfront mortgage insurance premium, the financed loan amount would be $407,000, as 1.75% of $400,000 translates to $7,000, which is financed over the term of the loan. Then, at an annual rate of 1.35% of the base loan amount, which is $5,400 a year, you have an additional (and pricey) $450 monthly mortgage insurance payment.
FHA Streamline Refinance Deals
There is an FHA premium loophole, however. Even if the property is an investment property or second home that used to be a primary residence, you can get a lower FHA Streamline premium if you took out the original mortgage before May 31, 2009.
Then, the upfront mortgage insurance premium drops to just 0.01% of the loan amount, and the monthly premium is 0.55% (annually) of the base loan amount. These numbers change considerably using our $400,000 example. The upfront financed fee drops to $40 and the monthly premium drops to $183 — indeed attractive for a secondary home or an investment property.
This loophole still applies even if the home is still your primary residence and you want to refinance. Occupancy does not change the terms of the mortgage insurance in this particular FHA loophole.
Other Scenarios for FHA Mortgages on Two Homes
Mortgage Tip: You can have two FHA mortgage loans at the same time.
Are you trying to purchase another principal residence with an FHA mortgage? If so, here are some other scenarios in which a loan underwriter would consider you for a second FHA mortgaged-property:
- The new property is outside of a reasonable commute time from the distance of your current primary home.
- Your growing family creates the need for “more house.”
- You’re departing from a jointly-owned property with another party.
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