FHA loans help make homes more affordable to buyers who might not be approved by conventional lenders. They require a much smaller downpayment and buyers don’t need a perfect credit score to get approved. Because of all of these benefits and more, FHA loans are a popular option, especially for first-time homebuyers.
Despite their popularity, there’s still a lot of confusion surrounding these loans. Many people ask whether or not they can have two FHA loans at the same time. The Department of Housing and Urban Development (HUD) actually has strict laws and regulations around FHA loans, and a single borrower having two FHA loans at once is a rare occurrence. In this guide, we’ll look into the situations where you might have two FHA loans as well as the situation surrounding borrowing.
HUD’s Rules on Loans
In general, the HUD states that a borrower can only have one FHA loan at once. Before applying for another FHA loan, the borrower is expected to pay off the first loan. However, despite this general rule, there are some specific circumstances in which the HUD will allow borrowers to have multiple FHA loans. This usually is only the case if the borrower’s situation has altered since they originally closed on the first FHA loan.
The process to qualify for more than one FHA loans is difficult. It’s really not common, nor is it encouraged. It might not even be the most financially sound decision since it might be possible to find another loan depending on your situation. However, here are the situations where the FHA might approve more than one loan:
- Relocation – If you’re relocating for an employment-based reason over 100 miles from your current home, you might be eligible for a second FHA loan.
- Growing Family – If your family has grown since you closed on your loan and your home is no longer a fit for your needs, you might qualify for a second FHA loan. In this specific situation, your Loan-to-Value (LTV) ratio needs to be 75% or less on your current principal residence.
- Joint Residence – Next, if you leave a jointly owned property with no intent to move back into this home, you might be able to get an additional FHA loan. This is most common in instances of divorce where the co-borrower continues to reside in the home.
- Non-Occupying Co-Borrower – Finally, you might be able to get a second FHA loan if you’re currently a co-borrower on an FHA loan but you don’t reside at this home.
As you can see, the FHA has outlined very specific situations for approving multiple FHA loans. These all are related to significant life changes, relocation, or situations that affect your home life.
The Pros and Cons of Multiple FHA Loans
So why would you choose to have multiple FHA loans in the first place? On the other hand, why might you choose to skip a second FHA loan and seek alternative funding? Most borrowers choose additional FHA loans because it’s a flexible, forgiving mortgage option. You only need to give 3.5% to 10% down, and you can get an FHA loan even with a lower credit score.
However, the FHA will also require the borrower to pay for something called Mortgage Insurance Premium (MIP) which is like private mortgage insurance. A portion of this MIP is charged upfront during the closing process as well as over the course of a year. This fee is around 1.75% of the loan amount. This MIP will need to be paid throughout the life of the loan. As you can guess, having multiple FHA loans will add to this cost.
Ultimately, there are a lot of things to consider before choosing to pursue a second FHA loan. Yes, it’s possible to have multiple FHA loans, but these low-barriers to entry also come with increased fees. There might be alternative borrowing options depending on your situation, so don’t jump right to FHA loans without talking to a borrowing expert.
Having more than one FHA loan is the exception, not the rule. More people have to finish paying their first FHA loan before they qualify for another. Like always, compare prices and shop between mortgage providers to find the best loan for your needs.