Can You Get an FHA Loan on a Second House?

FHA policies require that you live in the home that you finance with the FHA loan. According to the FHA website, after you have reached 75 percent equity in the original FHA loan, you may be eligible to apply for a second mortgage loan. In 2010, FHA introduced new rules that may make it more difficult for some borrowers to obtain a mortgage, but despite the more stringent rules, FHA mortgages are still more accessible than conventional mortgages for some.

Function

FHA loans are mortgage loans that are insured by the Federal Housing Administration. The loans are made through banks and other financial institutions and underwritten by the government. FHA loans feature less than five percent down payments, low closing costs, and they are more flexible on credit qualifications than with conventional mortgage loans. FHA loans may also be used to purchase homes that need substantial repair, and the related costs to repair the home may be included in the loan.

Qualification

To qualify for an FHA loan, you must have at least two years of steady employment, with the income amount steady or improving. In many cases, there is no minimum credit score required. If you have previously filed for bankruptcy, it must have been at least two years ago, and if you have previously experienced a foreclosure, it must have been at least three years ago. Additionally, according to HUD, your proposed mortgage payment should be no more than 29 percent of your gross income, before taxes are withheld.

Types

There are several types of FHA loans available to prospective borrowers. Title I single family loans are used for repairs and improvements to existing homes. The maximum limit for Title I loans is $25,000 and for no longer than 20 years. Title I multi-family maximums are: $12,000 per unit, up to $60,000, and for a term of no more than 20 years. The Title II 203(b) program, used by many first-time buyers to purchase a new or existing single family or multi-family home, is the most frequently used FHA program, according to the HUD website. Under Title II, a prospective FHA borrower has more flexibility in the terms.

Pros

The two main positive reasons to get an FHA loan are the flexible credit scores and the low down payment required to secure the loan. If your credit score is mediocre, you may be able to convince the FHA to underwrite your loan because of your steady employment or cash flow. Typical home mortgage loans require a 10 to 20 percent down payment, whereas most FHA mortgage loans only require a 3.5 to 5 percent down payment. Additionally, the FHA policies enforce limits on some fees that lenders can charge.

Consideration

Because FHA mortgages are guaranteed by the government, you may be required to pay a mortgage insurance premium on your loan. The insurance premium includes a down payment that may be financed and a monthly payment, both separate from the mortgage and property insurance amounts. Keep in mind the required time you must remain in your FHA insured home. If your sole purpose is to obtain investment property, an FHA loan may not be your best option.

References

• HUD.gov: Special Edition; David Stevens; December 2010
• HUD.gov: Let FHA Loans Help You; July 2009
• HUD.gov: About Title I Home Improvement Loans
• HUD.gov: "FHA Frequently Asked Questions"; Can I rent my current home and use the income to qualify for a new home using FHA?
• FHAoutreach.gov: "FHA Handbooks"; Guidelines for Credit Report Review; March 2011
• HUD.gov: Glossary (Debt-to-Income Ratio)