| FHA Loan Programs |
Certain types of loan transactions affect the amount of
financing available and the calculation of the maximum
mortgage. These transactions include identity-of-interest,
properties with non-occupying coborrowers, three- and
four-unit properties, properties for which a house will be
constructed by the borrower on his or her own land or as a
general contractor, payoffs of land contracts, and
transactions involving properties under construction
or less than a year old. Unless otherwise stated in this
Handbook, the mortgage calculation procedures described in
paragraph 1-6 also apply.
A. Identity-of-Interest Transactions. Identity-of-interest
transactions on principal residences are restricted to a
maximum LTV ratio of 85 percent. Identity-of-interest is
defined as a sales transaction between parties with
family relationships or business relationships. However,
maximum financing above 85 percent LTV is permissible
under the following circumstances:
financing available and the calculation of the maximum
mortgage. These transactions include identity-of-interest,
properties with non-occupying coborrowers, three- and
four-unit properties, properties for which a house will be
constructed by the borrower on his or her own land or as a
general contractor, payoffs of land contracts, and
transactions involving properties under construction
or less than a year old. Unless otherwise stated in this
Handbook, the mortgage calculation procedures described in
paragraph 1-6 also apply.
A. Identity-of-Interest Transactions. Identity-of-interest
transactions on principal residences are restricted to a
maximum LTV ratio of 85 percent. Identity-of-interest is
defined as a sales transaction between parties with
family relationships or business relationships. However,
maximum financing above 85 percent LTV is permissible
under the following circumstances:
Transactions that may affect
maximum FHA mortgage limits
maximum FHA mortgage limits
1. A family member purchases another family member's home as a principal residence.
If a property is sold from one family member to another and is the seller's investment property, the
maximum mortgage is the lesser of either:
2. An employee of a builder purchases one of the builder's new homes or models as a principal residence.
3. A current tenant purchases the property that he or she has rented for at least six months immediately
predating the sales contract. (A lease or other written evidence must be submitted to verify occupancy.)
4. A corporation transfers an employee to another location, purchases that employee’s home, and then
sells the home to another employee.
C. Three- and Four-Unit Properties. Regardless of occupancy status, the property must be self-sufficient (i.
e., the maximum mortgage is limited so that the ratio of the monthly mortgage payment, divided by the
monthly net rental income, does not exceed 100 percent).
The mortgage calculations described below are in addition to the calculations detailed in
paragraphs 1-6 and 1-7.
1. The monthly payment is the principal, interest, taxes, and insurance (PITI), including mortgage
insurance, plus any homeowners' association dues, computed at the note rate (no
consideration for buydowns may be given).
2. Net rental income is the appraiser’s estimate of fair market rent from all units, including the unit chosen
by the borrower for occupancy, less the appraiser’s estimate for vacancies or the
vacancy factor used by the jurisdictional HOC, whichever is greater.
This calculation is used only to determine the maximum loan amount. Borrowers must still qualify for the
mortgage based on income, credit, cash to close, and the projected rents received from the remaining
units. The projected rent may only be considered as gross income for qualifying purposes; it may not be
used to offset the monthly mortgage payment.
3. The borrower must have reserves equivalent to three months' PITI
after closing on purchase transactions. Reserves cannot be derived
from a gift.
D. Building on Own Land. If the borrower acts as a general contractor, and
builds a house on land that the borrower already owns, or acquires land
separately, maximum financing is available if the borrower receives no
cash from the settlement. The appropriate LTV limits are applied to the
lesser of:
1. The appraised value; or
2. The documented acquisition cost of the property, which includes:
(a) the builder's price, or the sum of all subcontractor bids,
materials, etc.; (b) cost of the land (if the land has been owned
more than six months or was received as an acceptable gift, the
value of the land may be used instead of its cost); (c) interest and
other costs associated with any construction loan obtained by the
borrower to fund construction of the property; (d) the closing costs
to be paid by the borrower; and (e) reasonable discount points.
Equity in the land (value or cost, as appropriate, minus the amount owed)
may be used for the borrower's entire cash investment. However, if the
borrower receives more than $250 cash at closing, the loan is limited to 85
percent of the sum of the appraised value and allowable closing costs.
Replenishment of the borrower's own cash expended during construction
is not considered as "cash back," provided the borrower can substantiate
with cancelled checks and paid receipts all out-of-pocket funds used for
construction.
E. Paying Off Land Contracts. If the borrower will use the loan to
complete payment on a land contract, contract for deed, or other similar
type financing arrangement in which the borrower does not have title to
the property, the new mortgage may be processed as either a purchase or a
refinance transaction with maximum FHA-insured financing if the
borrower receives no cash at closing. If all loan proceeds are used to pay
the outstanding balance on the land contract and eligible repairs,
renovations, etc., the appropriate LTV ratio is applied to the lesser of:
1. The appraised value; or
2. The total cost to acquire the property (the original purchase price,
plus any documented costs the purchaser incurs for rehabilitation,
repairs, renovation, or weatherization), plus allowable closing costs
and, if treated as a refinance, reasonable discount points.
Equity in the property (original sales price minus the amount owed) may
be used for the borrower's entire cash investment. However, if the
borrower receives more than $250 cash at closing, the loan is limited to
85 percent of the sum of the appraised value and allowable closing costs.
Replenishment of the borrower's own cash expended for repairs,
improvements, renovation, etc., is not considered as "cash back," provided
the borrower can substantiate with cancelled checks and paid receipts all
out-of-pocket funds spent for those purposes.
F. Properties Under Construction or Existing Construction Less than
One Year Old Properties not meeting the criteria shown below are considered as under
construction or existing construction-less than one year old and are limited
to 90 percent financing, i.e., 90 percent of the lesser of the appraiser’s
estimate of value or sales price, plus or minus the adjustments required by
paragraph 1-7, A-C. For a property to be eligible for greater than 90
percent financing, whether or not it has been previously occupied, it must
meet one of the criteria described below. Otherwise, the property is
classified as "under construction" or "less than one year old" and is limited
to 90 percent financing.
1. Construction was completed more than one year preceding the
borrower's signature on the Addendum to Uniform Residential
Loan Application (form HUD-92900-A, page 2); or
2. The dwelling's site plans and materials were approved by the
Department of Veterans Affairs (VA), an eligible DE underwriter,
or a builder under FHA's builder certification procedures, (see
HUD Handbook 4145.1 REV-2) before construction began; or
3. The local jurisdiction has issued both a building permit (prior to
construction) and a Certificate of Occupancy or equivalent.
(NOTE: This paragraph does not apply to condominiums or
manufactured housing because of the special circumstances
regarding their approval.); or
4. The dwelling is covered by a builder's ten-year insured warranty
plan that is acceptable to HUD; or
5. The dwelling will be moved to a new location and the property is
eligible for an insured mortgage at the new location by one of the
methods described in 2 above.
If a property is sold from one family member to another and is the seller's investment property, the
maximum mortgage is the lesser of either:
- 85 percent of the appraised value, or The appropriate LTV ratio percentage applied to the sales
price, plus or minus required adjustments. The 85 percent limit may be waived if 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.
2. An employee of a builder purchases one of the builder's new homes or models as a principal residence.
3. A current tenant purchases the property that he or she has rented for at least six months immediately
predating the sales contract. (A lease or other written evidence must be submitted to verify occupancy.)
4. A corporation transfers an employee to another location, purchases that employee’s home, and then
sells the home to another employee.
- Non-Occupying Borrowers. When there are two or more borrowers, but one or more will not
occupy the property as a principal residence, the maximum mortgage is limited to a 75 percent LTV.
However, maximum financing, as described in paragraph 1-7, is available for borrowers related by
blood, marriage or law (spouses, parent-child, siblings, stepchildren, aunts-uncles/nieces-nephews,
etc.), or for unrelated individuals that can document evidence of a family-type, longstanding, and
substantial relationship not arising out of the loan transaction. All borrowers, regardless of
occupancy status, must sign the security instrument and mortgage note. If a parent is selling to a
child, the parent cannot be the coborrower with the child on the new mortgage unless the loan-to-
value is 75 percent or less. To reduce risk exposure, mortgages with non-occupying co-borrowers
are limited to one-unit properties if the LTV will exceed 75 percent. While we do not object to
legitimate transactions in which non-occupant borrowers assist in the financing of the property–
such as when parents help their children buy a first home–this arrangement may not be used by
non-occupant borrowers to develop a portfolio of rental properties. The degree of financial
contribution by the non-occupant borrower, and the number of properties similarly owned, may
indicate that an investor loan has become the practical reality and that, in effect, family members
are acting as "strawbuyers." FHA does not impose additional underwriting criteria on such
transactions, such as specific qualifying ratios the occupying-borrower must meet individually.
Lenders must judge each transaction on its merits.
C. Three- and Four-Unit Properties. Regardless of occupancy status, the property must be self-sufficient (i.
e., the maximum mortgage is limited so that the ratio of the monthly mortgage payment, divided by the
monthly net rental income, does not exceed 100 percent).
The mortgage calculations described below are in addition to the calculations detailed in
paragraphs 1-6 and 1-7.
1. The monthly payment is the principal, interest, taxes, and insurance (PITI), including mortgage
insurance, plus any homeowners' association dues, computed at the note rate (no
consideration for buydowns may be given).
2. Net rental income is the appraiser’s estimate of fair market rent from all units, including the unit chosen
by the borrower for occupancy, less the appraiser’s estimate for vacancies or the
vacancy factor used by the jurisdictional HOC, whichever is greater.
This calculation is used only to determine the maximum loan amount. Borrowers must still qualify for the
mortgage based on income, credit, cash to close, and the projected rents received from the remaining
units. The projected rent may only be considered as gross income for qualifying purposes; it may not be
used to offset the monthly mortgage payment.
3. The borrower must have reserves equivalent to three months' PITI
after closing on purchase transactions. Reserves cannot be derived
from a gift.
D. Building on Own Land. If the borrower acts as a general contractor, and
builds a house on land that the borrower already owns, or acquires land
separately, maximum financing is available if the borrower receives no
cash from the settlement. The appropriate LTV limits are applied to the
lesser of:
1. The appraised value; or
2. The documented acquisition cost of the property, which includes:
(a) the builder's price, or the sum of all subcontractor bids,
materials, etc.; (b) cost of the land (if the land has been owned
more than six months or was received as an acceptable gift, the
value of the land may be used instead of its cost); (c) interest and
other costs associated with any construction loan obtained by the
borrower to fund construction of the property; (d) the closing costs
to be paid by the borrower; and (e) reasonable discount points.
Equity in the land (value or cost, as appropriate, minus the amount owed)
may be used for the borrower's entire cash investment. However, if the
borrower receives more than $250 cash at closing, the loan is limited to 85
percent of the sum of the appraised value and allowable closing costs.
Replenishment of the borrower's own cash expended during construction
is not considered as "cash back," provided the borrower can substantiate
with cancelled checks and paid receipts all out-of-pocket funds used for
construction.
E. Paying Off Land Contracts. If the borrower will use the loan to
complete payment on a land contract, contract for deed, or other similar
type financing arrangement in which the borrower does not have title to
the property, the new mortgage may be processed as either a purchase or a
refinance transaction with maximum FHA-insured financing if the
borrower receives no cash at closing. If all loan proceeds are used to pay
the outstanding balance on the land contract and eligible repairs,
renovations, etc., the appropriate LTV ratio is applied to the lesser of:
1. The appraised value; or
2. The total cost to acquire the property (the original purchase price,
plus any documented costs the purchaser incurs for rehabilitation,
repairs, renovation, or weatherization), plus allowable closing costs
and, if treated as a refinance, reasonable discount points.
Equity in the property (original sales price minus the amount owed) may
be used for the borrower's entire cash investment. However, if the
borrower receives more than $250 cash at closing, the loan is limited to
85 percent of the sum of the appraised value and allowable closing costs.
Replenishment of the borrower's own cash expended for repairs,
improvements, renovation, etc., is not considered as "cash back," provided
the borrower can substantiate with cancelled checks and paid receipts all
out-of-pocket funds spent for those purposes.
F. Properties Under Construction or Existing Construction Less than
One Year Old Properties not meeting the criteria shown below are considered as under
construction or existing construction-less than one year old and are limited
to 90 percent financing, i.e., 90 percent of the lesser of the appraiser’s
estimate of value or sales price, plus or minus the adjustments required by
paragraph 1-7, A-C. For a property to be eligible for greater than 90
percent financing, whether or not it has been previously occupied, it must
meet one of the criteria described below. Otherwise, the property is
classified as "under construction" or "less than one year old" and is limited
to 90 percent financing.
1. Construction was completed more than one year preceding the
borrower's signature on the Addendum to Uniform Residential
Loan Application (form HUD-92900-A, page 2); or
2. The dwelling's site plans and materials were approved by the
Department of Veterans Affairs (VA), an eligible DE underwriter,
or a builder under FHA's builder certification procedures, (see
HUD Handbook 4145.1 REV-2) before construction began; or
3. The local jurisdiction has issued both a building permit (prior to
construction) and a Certificate of Occupancy or equivalent.
(NOTE: This paragraph does not apply to condominiums or
manufactured housing because of the special circumstances
regarding their approval.); or
4. The dwelling is covered by a builder's ten-year insured warranty
plan that is acceptable to HUD; or
5. The dwelling will be moved to a new location and the property is
eligible for an insured mortgage at the new location by one of the
methods described in 2 above.
