Is an FHA loan only for first-time homebuyers?

by | Apr 12, 2022

This is a common question on the minds of new clients or people who have bought a house in the past. They hear about the FHA on the radio or from a friend and want to know if they can use it to buy another home since they were unaware of it when making their first home purchase. 

So, let’s get right into it. Well, the answer depends on why you’re buying another home. Don’t worry; we’re going to go over the rules and everything you need to know about the FHA loan. We’re going to cover whether or not the FHA loan is an excellent fit for people who are not first-time homebuyers.

The 20 Percent Myth 

There is this weird myth that you have to put 20 percent down on a home, which is not true, not even on a conventional loan. Many people think of the FHA as a kind of discount way to get a house because you’d only have to come in with as little as three and a half percent down, which sounds tempting.

However, you can come in with as low as three percent on your first house, even on a conventional loan. 

FHA Loans for Second-time Homebuyers

If you’re buying a second home as an upgrade, let’s say you’re moving from one home or state to another, then you are not qualified for that three percent conventional down payment. 

As a second-time homebuyer, you’re going to have to go at least five percent down, which is still really good if you think about it. It’s still a pretty small amount of down payment. It’s not the three percent conventional down payment, and it’s also higher than the three and a half of an FHA loan. 

So if you’re buying an upgrade to your first home or moving to a different area, and you’re worried about coming up with that initial down payment, you should consider the FHA. With it, you can come in with three and a half percent. 

Things You Cannot Do with an FHA

No rule says the FHA is only reserved for first-time homebuyers. However, let’s go over a few things you can’t do with an FHA. If you are seriously considering buying or refinancing a house, you owe it to yourself to get accurate and up-to-date information from an actual loan officer like me. 

Unfortunately, there are a lot of predatory lending practices in this industry, and the more educated you are, the better prepared you’ll be to see a bad deal if offered one. As the third or fourth lender that people talk to regularly, I’ve seen some horrible deals. I just saved someone $15,000 compared to the other lender they spoke to who was just price gouging. This happens, maybe not often, but it does happen. 

Now, let’s get right into what you cannot do with an FHA.

Rent it out

First and foremost, you cannot rent out your FHA home. An FHA home was, is, and always will be under the purview of the idea that you will live in the home. 

The FHA program was designed to make homeownership affordable for people. It was designed for people who struggled to qualify for a conventional loan, usually because they had a small down payment and not the best credit. The FHA was not designed for people who want to buy and rent the property. 

Fix and Sell

Now, can you buy, live in the property, and maybe fix it up and then sell it with an FHA loan? Yes, absolutely, as long as you’re living there for a time. You cannot rent that property out while you have an FHA loan on the property for the life of the FHA loan. 

So even if you live there during the remodeling and then decide to rent it out three years down the line, as long as you have an FHA loan on the property, you cannot rent it out.

House Hacking with FHA Loans

Even though you cannot rent a house with an FHA loan, you can house hack it. If you are not familiar with house hacking, it’s simply renting out a portion of your home. For example, you’re renting out rooms in the house, or if you have a two-unit house like a duplex or even a three-unit like a triplex, you can rent out one of the units, and you live in the other. That’s house hacking. 

Your tenants or your roommates are essentially paying for your rent while you’re living there for free. You are a hundred percent allowed to house hack with an FHA loan, and in fact, it’s an excellent option for young people in college or right out of college who were able to save several thousand dollars from side jobs.  

I wish I had known about this when I just graduated. I would have bought a small house, lived in one room, and rented out the other two. I would live there rent-free, get out of my parents’ house, and then let the property value appreciate over time while the other people are paying the mortgage. It’s a fantastic thing to do, and I hope my kids do it. 

It’s brilliant and the FHA program makes it super easy. However, the caveat is that you have to live there. The person who has the FHA loan has to live at the property. 

Can You Use an FHA Loan to Buy a Second Home?

I’m not talking about buying a second home that you’re moving up from. I’m talking about a vacation house or a secondary home like a condo on the beach. The FHA is not designed for that. Even though some people try to get away with that, the truth is that you shouldn’t do it. The FHA doesn’t allow it. 

The FHA loan is not designed to have it as a second loan, and just so you know, occasionally, government-sponsored entities or the government themselves send people out to these homes that have FHA loans. They go to see if the person who’s supposed to be living there actually lives there. They do this check-in once in a while, and you can get in trouble if you do not live there.

FHA Limitations on Condos 

Condos are a great deal in certain areas. They provide great value and a great location. You might even be able to get a condo that’s half the price of a house in an area filled with houses.

If you want to be in certain school districts or close to some areas of metro life, condos can often be a great way to get in there. However, there’s a problem with FHA loans and condos. 

You cannot qualify for many condos with an FHA loan. This is because FHA loans have to approve condo complexes, and there’s an HOA board that they want to look at, including different master policies. Sometimes, there are lawsuits involving condo complexes, where the condos are suing insurance companies, or former tenants are suing them, and FHA does not want to get involved. Hence, there aren’t many FHA condos in certain areas, especially high metro areas like in the Los Angeles area. 

There are few and far between condo communities where they will accept an FHA loan. So if you’re looking at condos or townhomes that are in a big community, one of maybe 90 units or 100 units or whatever units, you should look with your realtor and see if it is approved for an FHA because there’s a possibility that it is not okay for an FHA, and if so, you’re just wasting your time looking at that property. However, if you find a condo with an FHA approval, you are gold and should go for it. 

Sellers’ Reactions to an FHA

One other thing to think about with FHA is if you didn’t use one on your first purchase, and you’re upgrading or moving areas, and you plan to use an FHA to make offers on your next home, you might be in for a little bit of a shock to find out that sellers don’t really like FHA loans. 

So if you’re in a seller’s market where there are more buyers than sellers like we are in right now in 2022, it’s a crazy seller’s market, and there are multiple offers on almost every property out there, you’re going to have a hard time with an FHA loan. The seller and the realtor might tell you that some of these FHA loans don’t close or that they have stricter appraisal rules. They might even tell you that a lot of people have a hard time qualifying or that it’s a little bit hard of a process. Essentially, you might get a little bit of pushback from sellers if you go for an FHA loan.

Your FHA loan is not something you can hide so easily. After all, they’re going to see it on your pre-approval or your term sheet. Just be aware that you might have to bid on a few more properties than you’d like to get that FHA offer accepted.

Who are FHA Loans for?

Two things should be considered when determining who FHA loans are meant for. These are the down payment and your credit score.

Down Payment

The FHA loan is for you if you are struggling with making the down payment, and you do not qualify for the three percent conventional since it isn’t your first house. Also, if that five percent is a little bit hard to swallow, then the three and a half percent of the FHA loan might be just the perfect fit for you. 

Essentially, if you are a second-time buyer and you’re struggling with the down payment, then the FHA loan might be the answer. 

Credit Score

An FHA might be a suitable fit If you have bad or average credit. A credit score of 620 to 680 is kind of that sweet spot where FHA is the first product I think about. Technically, you can still find banks that will do under 620. They’re few and far between, however. 

I’ve worked with dozens and dozens of lenders as a mortgage broker, and not a lot of them want to work with people with a credit score of less than 620, especially right now in this market. There are many buyers who are already qualified at a score of 700-800. 

If your credit score is under 620, my advice is to do everything you can to get above 620  because 620 is that magic number where you can start qualifying with just about any lender Most banks will work with 620 and, with a credit score of 640? Every bank I know will work with you. There are almost no banks that won’t work with 640 so that should be your ultimate goal.

If you’re above 680-700 and that 5 percent down is a possibility, I’d advise you not to even think of an FHA because it really is not going to make sense for you.  

So, regarding purchasing your second home, an FHA is for you if you’re struggling with the down payment or have a bad or average credit score. 


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