Grab A Paper Bag: FHA Changes Rental Income Rules for Loans

I had a panic attack the other day when a co-worker informed me she just had clients get turned down for a loan because “FHA is no longer letting you count 75 percent of a property’s rental income toward qualifying for the loan”.

Gulp. That would nearly destroy the owner-occupied duplex market.

So I did some digging.

Turns out that yes, FHA did change its rules on using the rental income to qualify; on your purchase of a second home. According to HUD, FHA has seen an increasing number of homeowners choosing to vacate their existing homes and purchase a new one. This may be due to a number of reasons: a shorter commute, growing family, or simply a terrific opportunity.

If the homeowner isn’t able to sell the house or qualify for two mortgages on her own, she has a problem. Many are choosing to solve this by renting their first home out in order to cover the mortgage, which seems like a reasonable enough solution.

The problem is the FHA is concerned that in order to qualify for the second property, the homeowner may provide the bank with misleading facts as to the rental market value of their original home. Were this the case, the home may not demand enough rent to cover the mortgage payment and consequently, end up as another foreclosure.

Of course, there are always exceptions. In order to obtain a mortgage for a second property, the homeowner must be able to: qualify for both properties on her own, be relocating with an employer to an area not within a reasonable commuting distance, or have at least 25 percent equity in the first property.

The thinking with the latter is clearly that the homeowner has more to lose, and the FHA may prevent a “buy and bail”. What’s that? It’s when someone buys a more affordable house with the intention of no longer making payments on the first. Oh? And by the way? If you’re thinking of doing this, it is considered mortgage fraud, which is cause for legal action.

So can you still use 75 percent of the rental income of a duplex to help you qualify to buy the property? Absolutely! It pays to check the facts.