Transactions That May Affect Maximum FHA

There are several loan transactions that can affect how the maximum mortgage amount is determined.

Identity-of-Interest Transactions

The term “identity-of-interest” applies to a sales transaction between two parties that have a familial or business relationship. Transactions of this type on principal residences are limited to an 85% maximum loan-to-value ratio. Financing above this threshold is allowable in the following cases:

1. If the home is sold by one family member to another family member as a principal residence
2. If a builder sells a new home to an employee as a principal residence
3. If a current tenant who has rented for at least six months before the sales contract buys the property he or she is occupying
4. If a corporation purchases the home of an employee who has been relocated and sells that home to another employee.

Non-Occupying Borrowers

The maximum mortgage is limited to an LTV of 75% when there are multiple borrowers and not all of them are living in the home as a principal residence.

However, there are exceptions in cases where multiple borrowers are related by blood, marriage or law, and in some cases, for non-familial but long-standing relationships that existed well before the loan was made. (A parent helping with their child’s home purchase is a common example of a non-occupying borrower.)

In these situations, maximum financing will be permitted, but only for a single-family home if the LTV exceeds 75%. This restriction is meant to reduce risk exposure and to prevent instances of relatives being used to set up de-facto investor loans and straw purchases of multiple properties.

Three- and Four-unit Properties

These properties must be determined to be self-sufficient, meaning that the the monthly mortgage payment divided by the monthly net rental income does not exceed 100%.

The monthly mortgage payment includes principal, interest, taxes and insurance (known as PITI), and specifically includes mortgage insurance and any homeowners’ association fees.

The net rental income is based on the appraiser’s estimate of the fair-market rental values of all units, including the unit the borrower occupies, minus the appraiser’s estimate for vacancies or the relevant HOC’s vacancy factor.

The projected rent from the property is counted as gross income and cannot offset the monthly mortgage payment. To qualify for the mortgage, the borrower must still fulfill the requirements of income, credit, and cash to close in addition to the projected rental income from the other units.

After closing on purchase transactions, the borrower is required to have on hand (and not from gifts) the equivalence of three months’ PITI.

Building on One’s Own Land

Maximum financing is available if the borrower is building a home on his or her own land, as long as he/she does not receive any cash from the settlement.

The relevant loan-to-value limits are applied to the appraised value or the documented cost of acquiring the property, whichever amount is less.

The documented cost is determined by several factors, which include the builder’s price, the cost of the land, interest on construction loans, closing costs paid by the borrower, and reasonable discount points.

Borrowers who are building on their land can use their land’s equity (value or cost minus amount owed) for the whole cash investment.

If the borrower receives a cash amount greater than $250 at closing, the loan can be no more than 85% of the sum of allowable closing costs and the appraised value.

Paying Off Land Contracts

If the borrower is using the loan to finish paying a land contract or a similar finance arrangement in which the title is not the borrower’s, maximum financing is available for the new mortgage as long as no cash goes to the borrower at closing.

Assuming all of the funds from the loan are used towards paying off the outstanding balance left on the contract and eligible renovations and repairs, the appropriate LTV ratio will be applied to either the appraised value or the property’s total acquisition cost plus allowable closing costs — whichever value is less. (Reasonable discount points apply to the total cost if the loan is treated as a refinance.)

Borrowers who are paying off a land contract can use their land’s equity for the whole cash investment. However, if the borrower receives a cash amount greater than $250 at closing, the loan can be no more than 85% of the sum of allowable closing costs and the appraised value.

Properties that are Under Construction

All properties that are currently being constructed or have construction less than one year old are limited to 90% financing, with the following exceptions:

1. The construction concluded more than a year before the borrower signed the Addendum to Uniform Residential Loan Application
2. Before construction began, the site plans and materials were approved by the Department of Veterans Affairs or a builder under the FHA’s builder certification procedures
3. The property has been approved with a Certificate of Occupancy and a pre-construction building permit from the local jurisdiction, provided the property is not a manufactured home or condominium
4. The property has ten-year warranty from a builder in a manner approved by HUD
5. The property is to be moved to a new location at which it is eligible for mortgage insurance according to the methods described in item 2.