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FHA Provides Underwriting Guidance on Converting Existing Homes to Rentals - Mortgagee Letter 2008-25

Published on Thursday, October 02, 2008 in Client and Friends Memo, FHA

On September 19, 2008, FHA issued Mortgagee Letter 2008-25 to provide underwriting guidance on FHA insured transactions where a principal residence is being vacated in favor of another principal residence. Due to FHA's concern that some homebuyers in these transactions may attempt to provide misleading information regarding the rental income of the principal residence being vacated to qualify for the FHA mortgage on the new principal residence, FHA is instituting underwriting guidance designed to assure that the homebuyer can make payments on the full debt service of both mortgages.

Mortgagee Letter 2008-25 applies solely to a principal residence being vacated in favor of another principal residence. Mortgagee Letter 2008-25 does not apply to existing rental properties disclosed on the loan application and confirmed by tax returns (Schedule E of form IRS 1040) or to a principal residence being vacated secured by a mortgage insured by FHA. Please note that in this latter instance, eligibility for a second FHA insured mortgage can only occur under the exemptions described in handbook HUD-4155.1 REV-5, paragraph 1-2.

Beginning with case number assignments on or after September 19, 2008 and until further notice, the underwriting analysis may not consider any rental income from the principal residence being vacated except under circumstances described in Mortgagee Letter 2008-25. Please refer to the copy of Mortgagee Letter 2008-25 attached to this memorandum for a complete description of these limited circumstances under which rental income may be considered. 

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