FHA loans?

Question

Hey - first post, brand new to the site. Trying to wrap my mind around something after watching this video: https://www.youtube.com/watch?v=6IZZ7-Pknnc&index=5&list=WL

My wife and I are burnt out on renting, and have been setting money aside for a single family home downpayment, but we both hate our jobs, and thought it might make our lives easier if we bought a duplex/triplex.

Just for example:  Let's say I found one for 100k. With an FHA, I could buy a duplex for 3,500 down? This seems insane to me. Is this a real thing?

Robert Leonard · Answer

Dan Sanders !

The only thing I'll add is that, that PMI on an FHA loan is now for the life of the loan! It does NOT go away like it used to.  It used to go away when your loan was below 80% LTV, but now, it's for the life of the loan!  That's a huge difference.

Zach Davis · Answer

Yes, you can buy up to a 4plex with an FHA loan. Keep in mind that you may have problems finding a property that will cash flow on 3.5% down and still pass FHA inspections. Also, remember that you will have FHA mortgage insurance on top of your PITI payments. Annual FHA mortgage insurance on a loan under $625k is going to be 1.3% of the loan amount,  For example, a $450k mortgage will likely have a $5850 annual or $487 per month mortgage insurance premium on top of your mortgage, taxes, and property insurance payments. And don't forget to include loan origination fees and the FHA funding fee in the "down payment" amount. That $100k duplex in your example would likely cost you more like $10,000 to get into rather than the $3,500 you mentioned, although only the $3500 would be an actual down payment. All that being said, it can work for the right property, just don't forget the extra expenses of an FHA when running the numbers.

Dan Sanders · Answer

Thanks for your help @Zach Davis !

Zach Davis · Answer

Yes, talk to a broker and get the actual upfront and monthly costs of the loan that you will be using then run the numbers to determine where you stand from a cash flow standpoint. Do not fall prey to the semi-subconscious, emotional, lowering expenses and raising income trap. Also, as @Robert Leonard mentioned, the mortgage insurance will no longer drop off when you hit the 20% equity mark you mentioned, you're stuck with it until you refinance out. You can use the property analyzer on this site to help you run the numbers and even post your findings for input from the other members here. Feel free to ask as many questions as you need. There are many, many members here much more experienced than myself and we'll all help you in whatever way we can. Good luck.

Dan Sanders · Answer

@Zach Davis So figuring out the feasibility of the PMI vs. putting the whole 20% down is just a matter of working the numbers and including the extra cost, right?

We'd be living in the duplex, so I'm ok with breaking even for a bit for the "free rent" aspect of it. But ultimately I'd like to keep it and rent both sides, which presumably would take place after we cross the 20% mark and can drop the PMI. So as long as we're profitable after PMI. Does this sound like someone who's thinking rationally or someone who is brand new and has no idea what he's talking about?

Zach Davis · Answer

@Robert Leonard I forgot about that detail. The Mortgage Insurance doesn't drop off anymore, the only way to get out is to refinance. BUT, if I remember right, when you refi out be prepared to pay off the remaining annual balance. If you Refi in February and have only made 2 payments you'll get dinged for another $4876 for the rest of the premium on the loan example I used earlier. Don't quote me on that since I haven't used an FHA in a while and also because they change the laws every 15 seconds but I seem to recall dealing with something like that several years ago.

@Dan Sanders If you do find something that needs work and won't pass FHA inspections, the 203k could be an option. Its part of the FHA program but is a rehab loan. It can be a bear to use but still only requires the 3.5 down, just FYI.

Dan Sanders · Answer

Thanks for the tips, guys. It seems like a conventional loan is maybe a better route, but I think I might have more flexibility in downpayment than I originally thought.

Adam Drummond · Answer

@Zach Davis

and  @Robert Leonard

these guys know what they're talking about, and hit on everything in my opinion.  also keep in mind that an fha loan is not intended for a property that needs much work.  I have had fha appraisals (im a realtor and an investor also) almost fall through due to the appraiser noting peeling paint on windows, stained carpets, crayon and marker on walls, etc.  best of luck.