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Clearing Up FHA’s 100 Mile Rule!
Question:
My customer’s current residence is financed with a conventional loan. They are looking at a new primary residence due to a job relocation and would like to buy a duplex. Since the down payment is much lower on an FHA 2-unit versus a conventional 2-unit, they are considering an FHA loan. They would like to rent their current home. I’ve heard there is a 100-mile rule that I should be concerned about. Can you explain that to me?
Answer:
The “100 Mile Rule” applies to two different circumstances:
1. Not Your Scenario but Important to Know:
When the borrower has an FHA loan on their current home but relocates due to employment, and wants to obtain a new primary residence with an FHA loan. If the borrower is trying to obtain a second FHA loan, then the “100 Mile” rule applies.
2. Your Scenario:
The borrower wants to obtain an FHA loan AND use the rental income from the departure residence. If Rental Income is being derived from the Property being vacated by the Borrower, the Borrower must be relocating to an area more than 100 miles from the Borrower’s current Principal Residence to be considered as income.
There is one additional stipulation regarding the use of rental income from a retained departure residence for FHA that some individuals may overlook.
“Where the Borrower does not have a history of Rental Income for the Property since the previous tax filing, including Property being vacated by the Borrower, the Mortgagee must obtain an appraisal evidencing market rent and that the Borrower has at least 25 percent equity in the Property. The appraisal is not required to be completed by an FHA Roster Appraiser.”
So, the bottom line for your client is twofold: whether the rental income from their departure residence is essential to their qualification for the new property. And if it is, you need to consider the present equity in their home and the 100-Mile rule in order to use the rental income.
Subscribers can access our highly detailed Rental Income – All Agency Comparison under the Charts & Checklists page.