You may have heard that FHA loans are popular among first-time home buyers, but what if you’ve already used an FHA loan in the past? Can you get an FHA loan a second time around too?
Can you keep your previous home financed with an FHA loan? And do you need to pay off your first FHA loan to qualify for the second? How many FHA loans can you have at the same time?
These are all questions that consumers need answered, which is why in this article I explore the possibility of getting an FHA loan more than once and the conditions in which that can happen.
Are FHA Loans for First-Time Buyers Only?
The property you’re financing with an FHA mortgage loan must be used as a primary residence, that is, as the owner of said property, you are required to reside at that property. This is an important aspect to understand when it comes to this type of federal loan.
While FHA loans are designed to facilitate home acquisition for first-time buyers that have bruised credit score and can’t qualify for conventional home loans, FHA loans are not exclusively created only for first-time buyers and you can access an FHA loan even if you have purchased a property before.
Even if the property you currently have is for investment purposes, for example, you can still be eligible for an FHA loan if you’re going to use the home you’re buying as your primary residence.
Any exceptions to the rule of owner occupancy is applicable only for government agencies and non-profit groups and a typical borrower is bound by the primary residence rule.
Next, let’s see how things change if your existing property is also an FHA financed property, and you want to get another property financed through an FHA loan. Is it even possible? And if so, what are the requirements?
Is it Possible to Qualify for a Second FHA Loan?
Yes, you will be able to use an FHA loan more than one. Just because you bought a home with FHA loan in the past, it doesn’t mean you can’t qualify for an FHA loan the second time.
Once the previous home loan is paid off, you will be able to apply for another one. The occupancy rules, however, prevent borrowers from using an FHA loan to buy a second property if they’re not going to use that property as their primary residence.
The primary residence rule means that you’re not allowed to use the loan to finance a vacation home or an investment property, you can use the loan solely to finance a family home and that home should be your primary residence.
Whether you’ve already paid off your FHA loan by making timely payments or you’re choosing to pay off your loan earlier than scheduled by selling your FHA financed home, the only requirement is to have made 12 months of on-time payments on your previous loan.
The 12-month period is even more important since you’ll need to have legally occupied the previous property for a year.
There is no penalty for paying off your FHA-insured mortgage loan earlier than the determined end date and you may even sell it to a buyer that uses an FHA loan themselves. What’s more, they can even assume your FHA loan.
Therefore, borrowers who wish to apply for a second FHA loan need to have their previous FHA loan paid off before they can apply for another one. Of course, as you will see below, there are some exceptions to the rule.
Did you know, that a seller can refuse to accept FHA loan? Read my linked guide to learn more on this topic.
Can You Have Two FHA Loans at the Same Time?
Generally, a borrower may have only one FHA loan at a time. However, there are certain exceptions and special circumstances that could warrant the approval of a second FHA loan while the first one is still active.
These exceptions include:
- Relocation for work to a place that is considered to be a long distance from the first property financed with an FHA loan;
- Leaving a mutually owned home because of a divorce;
- Family size increase that exceeds the resources of current home.
In the first situation, if relocating for work would result in a commute time that would be considered unreasonable by the lender, then a new FHA loan can be approved.
This extenuating circumstance is considered on a case-to-case basis; however, most lenders would contend that a commute time higher than one hour would be considered unreasonable.
Divorce is another situation which would allow a person to obtain a second FHA loan, while the first loan is yet to be paid off. In this case, a co-owner leaves the mutually owned home, and buys a new home.
The third situation is when there’s a significant increase in the size of a family and the currently financed home can no longer meet the needs of the family.
For example, if the first home is a two-bedroom home, but the family has tripled in size, then it’s safe to assume that the resources of the current home size no longer offer the right conditions for the family size increase.
Therefore, while theoretically, a borrower can have two FHA loans at the same time, lenders will require another qualifying factor, namely the debt-to-income ratio.
The DTI should be able to support paying two mortgage payments, or the current home must have 25% equity in which case rental income can be included in some circumstances.
In the absence of 25% equity, rental income cannot be used and the borrower will not qualify for a second FHA loan under these conditions.
Second FHA Loan and Bankruptcy / Foreclosure
If you have been through bankruptcy or foreclosure, you may not qualify for a second FHA loan. The time requirement of 2 years for bankruptcy and 3 years for foreclosure that’s applicable for first-time FHA loans is applicable for the second FHA loan as well.
Therefore, you must wait 2 years after bankruptcy and 3 years after foreclosure before you can qualify for another FHA loan. Of course, you must also meet the other eligibility requirements that apply for FHA loans (credit score of 580+, down-payment of 3.5%, good DTI ratio, etc.).
Lenders will perform a credit screening of the applicant using the Credit Alert Verification Reporting System and any claims on the CAIVRS report must be removed first to qualifying for an FHA loan.
If during the pre-screening process, the lender finds that your name is listed on the CAIVRS system, you cannot qualify for an FHA until the claim on your credit report is removed.
However, in the case of the following three extenuating circumstances, a borrower may still qualify for an FHA loan even if their name comes up in a CAIVRS report:
- Bankruptcy filing if the circumstances of the filing are out of the control of the borrower;
- In case of divorce if the party who was awarded the property and assumed payment responsibility defaults on payments after the divorce was finalized;
- In case of loan assumption, if the buyer that assumed the loan defaulted on payments after the sale of the property.
In these cases, the borrower cannot be held responsible for these payment defaults and may still qualify for an FHA loan.
Your name may mistakenly show up in a credit screening, which is an issue that can be solved by finding out which agency has listed your name and providing appropriate documentation to the lender that prove you’ve been up to date with payments.
What are the Alternatives to Multiple FHA Loans?
Applying for conventional financing would be one way to avoid having more than one FHA loan at a time.
The problem with conventional mortgage loans is that it’s more difficult to get approved for them since a higher credit score is required, plus the required down-payment can range between 5-20%.
However, it’s entirely possible to have multiple FHA loans at the same time, provided that you fit into one of the circumstances that qualify as an exception to the rule of a single FHA loan at a time, you have enough equity, you can use rental income and your DTI is low.
In any event, every borrower situation is determined, and approval is granted by the lender on a case-by-case basis.
In Summary…
Having had an FHA loan approved in the past, doesn’t disqualify you from getting another FHA loan in the future if your financial circumstances otherwise make you eligible for it. Therefore, it’s entirely possible to get an FHA loan more than once.
What’s more, you can even have more than one FHA loan at the same time if certain “extenuating circumstances” are met.
FHA loans aren’t designed exclusively for first-time home buyers, but they’re designed for owner-occupancy, and it’s a requirement that borrowers should be the primary occupants of the home they’re financing with an FHA loan.
I hope that by reading this article, you’ve found clear answers to the questions posed in the introduction, and you’re now more knowledgeable about the issues of applying for multiple FHA loans either consecutively or at the same time.