FHA downsizing rule?

[Tara Ballenger]

Have any of you come across FHA's supposed rule that you can't buy a 2-4 unit property if the unit you plan to owner occupy is significantly smaller than the residence you currently own or are moving from? What are the exact metrics they are using to determine denial based on this?

[Chris Mason]

Originally posted by @Tara Ballenger:

Have any of you come across FHA's supposed rule that you can't buy a 2-4 unit property if the unit you plan to owner occupy is significantly smaller than the residence you currently own or are moving from? What are the exact metrics they are using to determine denial based on this?

 There are no exact metrics.

Here's what you are up against:

- Occupancy fraud is when someone uses an owner occ mortgage to buy a property they intend to fully rent out.

- Occupancy fraud is currently the most common type of mortgage fraud.

- Underwriters are always on the lookout for it. A classic red flag is someone stating they intend to move into inferior housing without any non-financial motive that can be identified. 

- You need to be able to convince the underwriter of your true intent to occupy, and using the term "house hack" (or any financial incentive) in this letter to the underwriter is a non-starter.

- Not only do you need to convince the underwriter, but you need to convince them that a gov't employee at HUD will be convinced as well. Behind the magical curtain scoop for you: If a HUD DE underwriter loses their DE status, they may never be able to underwrite an FHA loan again and their income will likely go down >25%.

- Because it ultimately comes down to a human underwriter's judgement call once actually in escrow, many lenders do not want to deal with it.

If you want to share your owner occupancy motivations, I'd be happy to give you my ballpark opinion on the odds of it flying. Is it a shorter commute? Something about the yard appealing? An extra bathroom that your now-teenage kid needs? In-laws to move into one of the units  to help with the kids (in which case do not expect the rent from that unit to "count")? Etc.