August 10, 2015
FHA home loans offer a potential maximum financing of 96.5%, with a required minimum down payment (also known as a minimum investment) of 3.5%. But not all borrowers are eligible for the maximum financing amount. Some borrowers may be required to put more money down depending on circumstances. What are these circumstances?
The most obvious one hinges on a borrower’s credit history and FICO score. Borrowers who have “marginal” FICO scores or who don’t otherwise meet the lender’s minimum standards for the loan may be required to put more down as a “compensating factor”. But credit isn’t the only thing that can affect the FHA loan’s maximum financing amount on a given transaction.
HUD 4155.1 Chapter Two Section B has the guidelines for calculating the maximum financing amount permitted in certain cases. This section begins by stating:
“Certain types of loan transactions affect the amount of financing available to a borrower and how the maximum mortgage amount is calculated. These transactions include:
–identity-of-interest
–properties with non-occupying coborrowers
–three- and four-unit properties
–properties where a house will be constructed by a borrower on his/her land, and/or as a licensed general contractor
–payoffs of land contracts, and
–transactions involving properties under construction, or less than a year old.”
The first of these, the identity-of-interest transaction is more common that some might thing. According to Chapter Two, “An identity of interest transaction
is a sale between parties with family or business relationships.”
FHA loan rules state that the maximum loan-to-value (LTV) factor for identity-of-interest transactions on principal residences, “is restricted to 85%”. However there are some exceptions in such cases. One such example is the “family member purchase” which according to Chapter Two involves a situations where a family member buys another relative’s home to use as the principal residence.
“If the property is sold from one family member to another and is the sellers investment property, the maximum mortgage is the lesser of 85% of the appraised value, or the appropriate LTV factor applied to the sales price, plus or minus required adjustments.” The exception applies when the family member “…has been a tenant in the property for at least six months immediately predating the sales contract. A lease or other written evidence must be submitted to verify
occupancy.”
There are other situations where FHA loans may have different maximum loan-to-value percentages–we will cover them in our next blog post.
Do you have questions about FHA home loans? Ask us in the comments section.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
Browse by Date: