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How The FHA 100 Mile Rule Limits Your Ability to Buy a Home

There’s a new requirement for those who want to have a FHA loan.It’s called the FHA 100 mile rule.

Today in the U.S. housing market, the FHA loans are one of the most flexible loan programs available. They are amazingly flexible. Also, they only require a down payment of 3.5%. Probably, the FHA is the second most popular form of residential mortgages in the U.S., the first being conventional mortgages.

However, if you already own a house and you’re looking at an FHA loan in order to borrow money to buy another house, the FHA guideline might concern you.

The FHA ensures the lender in the event you don’t make your mortgage payments. While the FHA is incredibly flexible, it’s also very sensitive to rental income situations.

Let’s explain this problem with an example:

Let’s say you currently have a house. It doesn’t matter the type of loan you have on that house. So you’re considering to purchase a new primary home and you’re going to use rental income in order to qualify for the loan by renting out your old home. That makes sense. Basically, the departure residence would get converted from primary home to rental property home. Here’s what you need to take into account. The FHA guideline states that the new primary residence must be 100 miles away from the old departure residence. This means you cannot keep your house and then buy another one a few miles away. This only applies if you’re using an FHA loan for the acquisition of the new primary home.

The two houses need to be 100 miles away from each other

If this could be your case, it would be much better off going with conventional loan that requires a 3% or 5% down to acquire a new primary home. This is because conventional loans don’t have a 100-mile distance requirement.

Bottom Line

You should keep this in mind when you’re figuring out what you want to do with your property. Sometimes, considering changing loan programs or even selling the departure property could be a better choice. In this case, if you sell the departure property, you’ll have more money for the down payment. Moreover, it could also help you from having private mortgage insurance (PMI) which is a requirement of FHA Loans. This is something to take into account when determining what type of loan makes the most sense for you.

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