In our last blog post we discussed some of the basics about FHA loans, loan-to-value limits, and how certain circumstances might affect the maximum LTV on an FHA mortgage. Normally FHA single-family home loans for new purchases have a maximum LTV of 96.5%, requiring the borrower to make a 3.5% down payment.
But FHA loans can have different LTV percentages if certain conditions apply.
Homes that are purchased with non-occupying co-borrowers, for example, may require a higher down payment. According to HUD 4155.1 Chapter Two Section B, “A non-occupying borrower transaction involves two or more borrowers where one or more of the borrower(s) will not occupy the property as his/her primary residence. When there are two or more borrowers, but one or more will not occupy the property as his/her principal residence, the maximum mortgage is limited to 75% loan-to-value (LTV).”
The FHA does permit exceptions to this when the non-occupying co-borrower is a relative or family member. “…maximum financing…is available for borrowers related by blood, marriage, or law, such as spouses, parents-children, siblings, stepchildren, aunts-uncles, and nieces-nephews, or unrelated individuals who can document evidence of a longstanding, substantial family-type relationship not arising out of the loan transaction.”
Such transactions may involve situations where the seller is the parent of the borrower. Can the parent be both the seller AND a non-occupying co-borrower? According to Chapter Two, “If a parent is selling to a child, the parent cannot be the co-borrower with the child, unless the LTV is 75% or less.”
FHA loan rules include some additional regulations to prevent the abuse of these exceptions. If, for example, the LTV exceeds 75%, a mortgage that includes a non-occupying borrower would be restricted to a single-unit home. Furthermore, FHA loan rules explain, “The non-occupying borrower arrangement may not be used to develop a portfolio of rental properties. The financial contribution by the non-occupying borrower and the number of properties owned may indicate that the family members are acting as ‘straw buyers.'”
We’ll cover more on other FHA loan transactions that may have adjusted loan-to-value ratios in a future blog post.
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