Newbie Financing Question!?

Question

Hello all,

I am interesting in buying my very first investment property with an FHA loan. I am hoping to buy an owner occupied duplex...

If I was approved for $140,000 on a single family home by my mortgage person, would I be approved for more than that (say 175-200k) on a duplex since I would be generating income from the half that I wasn't living in?  This is going to have to be an FHA loan since I don't have enough money to comfortably to put 20% down on that large of a purchase.

Also, is it easy to obtain an FHA 203k loan for a duplex? I see a lot of duplexes in my area that are in great areas but are just outdated on the inside. It would be awesome to have an extra $10,000 or so to update the inside of the home I would be living in.

Thanks in advance for your responses and I apologize if this question has already been posted.  -Alex

Joseph Zanazan · Answer

We know nothing about what your finances are so this answer is about as specific as i can get without speaking out of place. The current automated underwriting approval certificate you have is based on a certain set of LTV and DTI ratios for the SFR. It absolutely doesn't guarantee you anything thats not whatever is guaranteed on the current approval verbatim. That home is sold at a certain amount, which determines a certain financed amount, which effects your goals as a landlord/homeowner, which ultimately determines whether or not you are a high or low risk investment for the lender. You probably already know that you need to be owner occupied and actually live in the property with only 3.5% down on an SFR and the DUP alike. FHA allows duplex financing obviously with the eligibility for qualifying the rent you're collecting from the other unit as income. Just like 1-unit FHA financing, gift funds are allowed towards down payment and closing cost. Your county limit tolerance for financed amount also goes up a bit to help you find a more appropriate property with the right number. Sellers can contribute towards bona fide closing costs but not the down payment. Even the 580 FICO score minimum is identical since they are both FHA, so thats a lot of good news for you. As long as there are no additional lender overlays, you won't be experiencing much difference in the underwriting process. Now whether or not you qualify for a duplex is a question you will have to look into the numbers to determine just like you did with the SFR.

Some things to think about that will ultimately answer all your questions are the down payment you currently have, the healthy monthly threshold you can tolerate for mortgage payments, what your goals are as an owner. As far as living space goes, assuming all things are relative, SFRs will always be more comfortable since you're not sharing your space with anyone. The duplex naturally costs more so your down payment will be larger. Since your down payment is larger, the amount you are financing is substantially larger as well. Now everything is being calculated off a larger figure, that means your homeowners insurance premium, property taxes and mortgage insurance premiums (both upfront and monthly dues) are higher as well. All these adjustments collectively represent your financial liability and how inflated your liability is compared to your earnings. Its what directly effects your ratios on income and cash-flow when its all said and done.

The obvious gem in all this would be your ability to use the rental income as a monthly contribution to your finances, while the vehicle in which you reside is slowly appreciating in value. Remember, the income you're receiving every month isn't entirely eligible to be accounted for, dollar for dollar. Thats what you're receiving but that figure must be treated for any tax deductions before it can truly be considered as a credit or debit. You're now filing two sets of income (assuming you're channeling everything through your personal and not business returns). Schedule A  for your primary residence, and Schedule E for your rental. After you have adjusted your true eligibility by subtracting everything you've already written off from your income, the figure left over will be either your income or your losses on this duplex. FHA has done their best to keep guidelines logical and fairly relative to one another, only touching on the certain aspects of the criteria that immediately effect the investors risk. At this point its all in the math. If the numbers allow it, then great.

Any FHA loan, 203b and 203k alike, do get fairly demanding when it comes to documentation and general paperwork, however what government loan doesn't? Whether or not you think its easy i think is ultimately a reflection of the attached goals you have and the heights you're willing to reach to obtain that goal. The 203k is the governments version of conventional construction financing that we all know so well and the only agency construction product available on the market right now. That means that whatever this loan brings to the table, it can't be matched or beat. The paperwork might be just as if not a little more lengthy than a regular 203b. Some might say its totally worth it, and some might argue that it just simply makes no sense. Figure out how willing and able you are to jump through all the hoops that a 203k loan presents after you do some research on it. I personally think it is a great tool for someone to use who knows how to utilize it properly. I would be more than happy to answer any general questions you might have about FHA financing.

Philip Williams · Answer

Hey alex hopefully I can help out, the easy answer is no you won't be approved for more. If you had previous experience in being a landlord 2 years specifically then yes you could be approved for more. Banks aren't going to bet on you being a good landlord, in there eyes you could be a horrible one. You could chase away the existing tenant not fix up the property etc. Once you have that two years under your belt have a rent roll some history then you can start going down this road. So more than likely you will still be approved for the same amount don't be discouraged though! A lot of people have gone down this path in fact if I can find it i'll link a great article that outlines something similar to what you are planning to do. I hope this helps, leave a vote or a comment if you liked :)

http://www.biggerpockets.com/renewsblog/2012/12/12/make-a-million-dollars/