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Getting a Second FHA Loan Exception

by K.C. Hernandez

A homeowner with a Federal Housing Administration loan may find herself in need of a second FHA-backed loan. Under certain circumstances, the FHA allows borrowers to obtain another FHA loan without having to pay-off an existing FHA loan. The government mortgage insurance protects lenders against a default. A borrower who must move, but has trouble qualifying for conventional financing, may need FHA financing due to its low down payment requirement and flexible qualifying standards.

Going the Distance with FHA

The FHA makes an exception for borrowers who must relocate to "an area outside reasonable commuting distance" from the home with the original FHA loan. FHA's guidelines don't otherwise specify a minimum distance between the new and old home. The lender, which underwrites and funds the FHA-insured loan, can define "reasonable distance." Therefore, different lenders may allow different distances for a relocation exception. Generally, lenders require a commuting distance of at least 50 miles, according to FHAAffordable.com.

Parting Ways with a Co-Borrower

The FHA makes an exception to its one-per-borrower rule when co-borrowers on an existing FHA-insured loan part ways. One borrower can remain in the home and continue making payments on the FHA loan and the other can move out and buy a primary residence with a new FHA loan. To prevent borrowers from acquiring investment property under this exception, lenders require evidence that the borrowers have parted ways. For example, a borrower who divorces her ex-spouse and co-borrower must provide the underwriter with a divorce decree stating that the co-borrower keeps the marital house; therefore, the vacating spouse needs a new home.

Non-Occupant Co-Borrowers Not Tied Down

The FHA's flexible qualifying standards allow borrowers to obtain a mortgage with the help of non-occupying co-borrowers. A non-occupant co-borrower has an ownership interest in the home, but does not occupy it as his primary residence. A non-occupant co-borrower may buy his own primary residence with another FHA loan and maintain his ownership interest in the house purchased by his family members. Under FHA guidelines, non-occupant co-borrowers must have a family-type relationship to the owner-occupant co-borrowers. Marriage, blood relation or legal familial ties qualify as family-type relationships.

Obstacles Regarding Present Property

Under the FHA's exception for increased family size, an FHA borrower can obtain a second insured loan, but the current house must have substantial equity. A borrower may qualify for a second FHA loan if the number of his dependents increases to the extent that the present property fails to meet the family's new needs. Lenders require evidence that the number of dependents has increased. For example, birth certificates or documentation of foster care status for children may serve as evidence that a borrower's one-bedroom home no longer meets his family's needs. Additionally, the lender requires an appraisal for the present home that shows at least 25 percent equity; therefore, the borrower may owe no more than 75 percent of the home's value on the present FHA loan.

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