Can an Underwriter Use Rental Income from the Primary Residence a Borrower is Vacating to Approve an FHA Mortgage?

Underwriters may NOT consider any rental income from a borrower’s principal residence that is being vacated in favor of another principal residence, except under the conditions described in HUD 4155.1 4.E.4:

• This policy assures that a borrower either has sufficient income to make both mortgage payments without any rental income, or has an equity position which makes it unlikely that he/she will default on the mortgage on the property being vacated.
• This applies solely to a principal residence being vacated in favor of another principal residence. It does not apply to existing rental properties disclosed on the loan application and confirmed by Schedule E of IRS Form 1040.

What are the two (2) excpetions to accepting rental income for a primary residence property (which borrower is vacating) for the purpose of getting approved for a new FHA Mortgage on a primary residence (FHA  Mortgage HUD 4155.1 4.E.4)?

1. Relocations

The borrower is relocating with a new employer, or being transferred by the current employer to an area not within reasonable and locally-recognized commuting distance. A properly executed lease agreement (that is, a lease signed by the borrower and the lessee) of at least one year’s duration after the loan is closed is required

2.  Sufficient Equity in Borrowers Vacated Property

The borrower has a loan-to-value (LTV) ratio of 75% or less, as determined by a residential appraisal no more than six months old, or, comparing the unpaid principal balance to the original sales price of the property.

For other guidelines and tips regarding FHA Mortgages for Investment Property, FHA Self-Sufficiency Rental Income Test, or 4321 Hack Strategy, please follow the links.