A secondary home can provide convenience, luxury, and a heap of enjoyment to your life. Financing, however, can be a challenge for these homes. Fortunately, the FHA guidelines for a secondary home allow for certain types of purchases.
With a primary home, the home you occupy all or a majority of the time, financing is relatively easy. Virtually all programs, including FHA loans, VA loan, jumbo loans, and conforming loans, are made almost specifically for a primary residence.
But what if you need a secondary home? What if you need a residence in an other city? In this case, finding a loan is a bit more complicated. (But certainly not impossible.)
Take the FHA loan as an example. These loans are perfect for numerous buyers, helping people qualify with a lower downpayment or even a poor credit score. But they intended to support homeownership among the American public, which means purchasing a primary home. They are not for vacation properties or investments, making it harder (or at least more complicated) to secure FHA financing on a secondary home.
Many people, even including people in our industry, assume that FHA loans are for primary homes only. But there are actually ways to use an an FHA on a secondary property. The FHA guidelines for a secondary home are fairly clear: it’s possible to use an FHA on a secondary property, you just need to meet a few specific of conditions.
No Vacation Homes, No Investments
With so many different rules and regulations, it’s important to get this out of the way first: when using an FHA loan, you cannot use it to purchase a vacation property or investment property. The FHA is intended to support affordable homeownership; vacation properties are seen as a luxury and therefore the FHA does not support their purchase. The same goes for investment properties. FHA loans are not intended to build your investment portfolio, so you can’t purchase a strict investment property with these loans.
(We should note, of course, that there are affordable financing options for vacation homes and investment properties. Contact our team for more information.)
Must Be for Employment Purposes
The FHA guidelines for a secondary home make it clear, with almost no exceptions, that the loans can be used for second property only when the new property (second) is for employment purposes. This could mean a home for seasonal work, a property near a corporate office, or a townhouse near a primary client. Regardless of the details, the purchase must be motivated, in some way, by work. (There are limited exceptions to this, so contact a lending agent for further details.)
FHA Guidelines for a Secondary Home
The basics of the FHA guidelines for a secondary home make it fairly clear. But first, it may be worth the time to define a “secondary home.” According to the FHA’s most recent guidelines release, a secondary property is a home that the “borrower occupies in addition to his/her principal residence.”
Secondary properties are not, in most situations, eligible for FHA-supported loans. But there are a few exceptions. As their guidelines state, FHA loans on secondary residences are only allowed when there is an “undue hardship.” One specific hardship outlined by the FHA is a situation when “affordable rental housing that meets the needs of the family is not available for lease in the area or within reasonable commuting distance of work.”
Okay, what does that mean exactly? Essentially what the FHA is saying is that if you are in a situation where you need a home in a different area, perhaps for work or to provide care for a loved one, you can only make the purchase using an FHA loan if there is no other affordable rental option .
Understanding the Guidelines: An Example
To make this more clear, let’s break it down in a specific example. Suppose you have a job that requires a significant amount of time in another city. Perhaps you work primarily from a regional office in San Diego, but the main corporate office, where you have to travel monthly, is in Phoenix. Instead of staying in a hotel for a week every month, you decide to purchase a property in Arizona.
In this situation, you would have to demonstrate that you cannot find an affordable rental property that would meet your needs in your desired area. How you demonstrate this lack of affordable renting is often the most complicated phase.
To be eligible, you (the borrower) must be purchasing a secondary residence because of seasonal employment, an employment relocation, or another situation whereby the purchase is not for recreational use or investment purposes.
As we noted above, you’ll have to show a “lack of affordable rental housing” in your desired area. This can be demonstrated with an explanation for the need of a secondary home in the new area, as well as a lack of rental housing. Written evidence can be provided by a local real estate professional who can verify that there is not acceptable housing in the new area.
Loan Amount Restrictions Also Apply
To use an FHA loan on a secondary property, there will be loan-amount restrictions. The guidelines state that “the maximum loan amount is 85% of the lesser of the appraised value or sales price.” So if the appraised value is $500,000 (and it’s lower than the sales price), you can only borrow 85% of $500,000, or $425,000 in total. This does mean that you’ll probably need a larger downpayment than usual if you are purchasing a secondary home with an FHA loan.
FHA Financing and Other Loan Options Available Now
The FHA guidelines for a secondary home are unique, and only apply to a few specific situations. If you need a loan for a secondary home, regardless of the purpose, contact us today. We’ll help you understand the requirements for using an FHA loan, and if this form of financing is not an option for your situation, we’ll find a product that works for you.
From your primary residence to a secondary homes to an investment property, we can help with all of your mortgage needs. Contact our team today and let us help you secure the right financing for your next purchase!
