If you’re a first-time home-buyer, you’ve probably heard that an FHA loan is the most direct path to buying a home. The down payment requirements are lower and credit score requirements are more lenient, which is why many home buyers choose this option.
That’s why it can be disheartening when you start the home buying process all over again only to find that a second FHA loan isn’t within your reach.
In general, buyers are only allowed to have one FHA loan at a time. In most cases, you’ll have to pay off your existing FHA loan before you can qualify for another. This complicates your home buying goals, especially if you haven’t yet sold your current home or you plan to keep your home and rent it out.
However, there are a few exceptions that allow you to have two FHA loans at the same time. Here’s what you need to know to avoid any surprises and get closer to your home-owning dreams.
Exceptions to Having Multiple FHA Loans
The path to getting multiple FHA loans is difficult, but not impossible. Here are some exceptions that may help you to qualify for a second FHA loan:
If you’re relocating because of a job, you may qualify for a second FHA loan. There is no set distance for eligibility, however. This is often determined on a case-by-case basis, but many experts say that anything over a one hour commute should qualify.
Increased Family Size
If you bought your home based on your current family size and your family grows, you could qualify for a new FHA loan. The exception requires a Loan-to-Value ratio of 75% or less, as determined by an up-to-date appraisal and your current mortgage loan balance.
If you were to co-borrow on an FHA loan but do not live in the home, you may qualify for another FHA loan. In addition, if you are leaving a jointly owned property that will be occupied by the co-borrower, another FHA loan could be an option.
Why Have Two FHA Loans, Anyway?
Granted, there are other mortgage options outside of an FHA loan. If you don’t meet one of the exceptions above, you’ll likely have to pursue other avenues.
However, given the low down payments and credit score flexibility, homeowners should at least look into whether they might qualify for a second FHA loan.
FHA loans only require 3.5%-10% for down payment. This means you don’t have to save up as much as you would for other loans, which could bring you closer to your home ownership goals. If you’re utilizing a home buyer rebate, you could hit your down payment minimum even sooner.
Also, credit scores as low as 500 can secure an FHA loan. Since it could take years to increase your credit score, the FHA loan is often the best chance for many home buyers to purchase a home.
Downsides to Having Multiple FHA Loans
Even if you might qualify for a second FHA loan, you should consider both the pros and cons that might make another loan a better option.
The biggest disadvantage to a second FHA loan is having to pay twice for mortgage insurance. The Mortgage Insurance Premium (MIP) is charged at closing (1.75% of the total loan amount) AND throughout the year, increasing your monthly payment until the loan is paid off. This fee can range from 0.55% up to 1% of the loan balance, so it does decrease over time as you make payments.
However, if the loan-to-value ratio decreases, your MIP is not affected (unlike private mortgage insurance).
Paying two sets of MIP can quickly add up and could prevent you from reaching other financial goals. It’s important to consider the picture prior to pursuing a second FHA loan to gauge the total impact it will have on your finances.
Low-Cost Alternatives to a Second FHA Loan
If a second FHA loan isn’t in your future, you do have other options that can meet your financial needs.
The HomeReady and Home Possible loans actually require less of a down payment than the FHA loan - just 3%. For a HomeReady loan, you’ll need a credit score of at least 620, while the Home Possible loan requires a credit score of 660.
The USDA loan requires no down payment and a credit score of 640.
Like the FHA loan, each of these loans is subjected to a mortgage insurance premium that can range from 0.75% up to 2%.
Is a Second FHA Loan Right for You?
Though not common, you can get a second FHA loan if you meet the right qualifications. However, alternatives like HomeReady or USDA Loan could provide you better options so that you don’t need another FHA loan.
Working with someone skilled in these unique circumstances can help you understand your options so you can make an informed decision. To learn how Clever Partner AGents can help, give us a call or fill out our contact form for more information.