FHA loan rules say the borrower is considered to have an “acceptable” payment history if all housing and installment loans have been paid on time in the last 12 months leading up to the loan application.
In order to rent out an FHA home, you first have to move into the property within 60 days of closing on the home. Then you have to live in the property for one year before you can start renting it out. The one-year time limit begins when you move into the property.
FHA Loan: Cons
Here are some FHA home loan disadvantages: An extra cost – an upfront mortgage insurance premium (MIP) of 2.25% of the loan's value. The MIP must either be paid in cash when you get the loan or rolled into the life of the loan. Home price qualifying maximums are set by FHA.
There are, however, some exceptions to the FHA 90-day flip rule and they are as follows: A builder who has built a new house, or who is selling to a borrower with FHA-insured financing. If the seller inherited the property. If the property is a resale by the HUD or its REO (real estate owned) program.
If you're currently in the market looking to buy a triplex or fourplex with FHA financing, you need to see if the property's rents pass the Self-Sufficiency Test. To be “self-sufficient” means that 75% of the property's rents need to cover the monthly payments.
In Los Angeles (California), it is 3 years 6 months because of high demand. In Chicago (Illinois), it is 2 years because of some accessible properties.
Some reasons a seller might refuse an FHA loan include misconceptions about longer closing times, stricter property requirements, or the belief that FHA borrowers are riskier.
An FHA loan may be a better option if you have a lower credit score, a higher DTI ratio, or less money saved for a down payment. On the other hand, a conventional loan may work better if your finances are sound and you can qualify for favorable loan terms.
Since your home must meet FHA property minimums, the appraisal process may include more requirements than a conventional home loan. The appraisal is required to be performed by an FHA approved appraiser and may have additional inspections which could result in a higher appraisal cost.
The FHA typically requires borrowers to occupy the property they're buying and use it for their primary residence for at least one year. By FHA standards, a primary residence is one in which the owner occupies the property for the “majority” of the year.
FHA loan rules do not permit rentals of living units in the home purchased with an FHA mortgage if those rentals are for less than 30 days. The Airbnb business model is not acceptable under FHA loan rules, which means that if you purchase with an FHA mortgage, Airbnb operations are a violation of the FHA loan rules.
Yes, you can refinance your FHA loan, and you have many different FHA refinance choices. The key is to select the loan type that makes the most sense for you and check that you meet the qualifications.
You may be denied for an FHA loan if you have declared bankruptcy but you have not had the bankruptcy discharged. You may be denied if you are delinquent on federal taxes or otherwise owe money to the federal government but without an approved payment plan.
FHA Loan Down Payments
The minimum down payment you're required to make on an FHA loan is directly linked to your credit score. Your credit score is a number ranging from 300 – 850 that's used to indicate your creditworthiness. An FHA loan requires a minimum 3.5% down payment for credit scores of 580 and higher.
The FHA flipping rule requires investors to hold properties for at least 90 days before selling to FHA buyers. This rule impacts property flipping plans by imposing additional scrutiny on sales within 91-180 days. Investors need to factor these timelines into their investment strategies.
FHA loans require borrowers to pay mortgage insurance premiums (MIPs) at closing and throughout the life of the loan. Specifically, you'll pay 1.75% of the loan amount at closing as your upfront MIP. Then, you'll pay MIPs of 0.15% to 0.75% of the loan amount every year.
A major benefit of a conventional loan is that the buyer often has higher credit ratings and more capital available for a down payment than with an FHA loan. On the other hand, FHA loans may be attractive to some sellers since they only require a small downpayment and have traditionally lower closing costs.
No, FHA loan PMI removal is technically impossible because PMI is for conventional mortgages only. FHA loans have MIP, which usually lasts 11 years or the life of the loan. To remove MIP, you must refinance into a conventional loan once you have enough equity.
Strict Property Standards
If the property you're considering isn't structurally sound or has safety issues, you may not qualify for an FHA loan. This could be an issue if you're thinking about buying a major fixer-upper. Before you can qualify for the loan, the property must undergo an inspection.
Must have an undamaged exterior, foundation and roof. Must have safe and reasonable property access. Must not contain loose wiring and exposed electrical systems. Must have all relevant utilities, including gas, electricity, water and sewage functioning properly.
Many sellers prefer conventional financing or any financing over FHA loans. Why? They feel that buyers who can secure any other financing option are 'stronger buyers. ' FHA buyers have a reputation for having low credit scores, little money to put down, and less than optimal qualifying requirements.
You won't be able to get cash at closing time on an FHA purchase loan except for a refund. Borrowers cannot apply for mortgage loans larger than the amount needed to buy and close the loan. You must have a minimum amount of payments made to qualify for many types of refinancing, including FHA cash-out refinance loans.
FHA loans can also be designed to be transferable without lender approval. The loan must have closed before December 1989 (which also means not many are still around). Otherwise, the lender must approve the new borrower.
While there's no limit to how many FHA mortgages you can get during your lifetime, you can generally only have one FHA loan at a time because you can only have one primary residence. This restriction helps keep the loan program – and its lenient requirements – from being used to purchase investment properties.