Is it possible to do FHA now and USDA later, or both?

Question

Hi, I truly want to undertake REI with no intent of committing mortgage fraud --- but I want to understand more about FHA and USDA (still trying to build my credit and no investment property yet, with 10k allotted to invest). I've been looking at FHA and USDA, aware that you cannot own any other home when using USDA, and USDA cannot be used for an income-producing purpose (also has household income limits per household size but amounts vary per county). With FHA, you're required to stay at the property as primary residence for a minimum of 60 days or longer (correct me if I'm wrong), and can use it as an income producing property thereafter.

My husband and I are totally new to this and running a few scenarios on how to start out exactly --- we want to start with owning smaller multi family properties (duplexes, quadplexes, etc. but no sfh) then with the end result owning bigger apartment complexes years later. Definitely open to feedback and appreciate anything else we need to consider that would ultimately help contribute to making this real. :)

Scenario 1: We have 3 children (5 of us total) and currently living in an apartment for $890/mo (rent includes electric, gas, water/sewer/trash). We can go FHA on a duplex, rent the other side to cover our expenses. Eventually, we can get a SFH to live in later,but can we use USDA on this SFH while renting out the duplex?

Scenario 2: Get a SFH first via USDA (100k or less) to cut down on living expenses then start investing (FHA) in small multi family properties?

Scenario 3: Stay as a renter where I am now and wait until my credit score gets higher (630 now)? I feel like I'm just running in circles, and I can't take any chances on soft inquiries on my credit asking mortgage lenders these possibilities. Thanks BiggerPockets in advance!

John Sanabria · Answer

Both loan types are a bit tricky for different reasons, but both can be done.

USDA doesn't require you to only own no other properties. USDA loans are actually the government's way to expand growth in rural areas, so they are very open to helping you. You have an income cap, but that's about it. The other cool thing is that you can put as little as $0 down and there's no PMI! Traditional USDA loans can be used for income properties (1-4 unit), and a house can have in law suites. USDA even has a multi-family arm for those types of loans, but they have some other qualifications. One thing that is tricky about USDA loans is they have to be in eligible areas. There is an online map which will show you where you can and can't use their loans and it allows you to toggle from SFR to MFR (https://eligibility.sc.egov.usda.gov/eligibility/w...). Your best bet is to find someone who specializes in USDA loans and talk with them. **Technically you must live in a USDA loan property for 1 year from day of closing**

FHA loan program doesn't stipulate that you must own no other home, but you should check with your lender to make sure they don't require it (some do). FHA can be used on income producing properties (1-4 unit) and it's a bit easier to do with FHA than it is with USDA. FHA only goes as low as 3.5% down, vs the 0% down on USDA, and FHA will make you pay PMI. One very cool thing about FHA (not sure if USDA does this) is that if you buy a 4 unit, for example, they will take the unit(s) that you don't plan to live in and will let you add 75% of the rent to your income to even qualify for the loan. It's very rare that you are able to use income you don't even make yet to qualify for a loan, so this helps quite a bit as a beginner. One thing that's tough about FHA is that you are only allowed to have one FHA loan at a time. I would use this loan on your very first (4-plex if possible, since it will make the most use of the other renter's money and will give you the best cash flow for your one and only 3.5% down). After that I would leave that loan in place and only change or re-finance it after you have 20% so you can take off the PMI.

Both USDA & FHA don't require much of a credit score (630 should be just fine on both), so you should look into it! Even though you are technically required to live in the properties for 1 year, no one will ever go and check. Just don't expect to be able to get another primary home loan during that year. I don't recommend not living in the property, but just wanted to throw that out there.

I recently bought a SFR in AZ using USDA and put $0 down (in 2016). If you have any questions about the process, feel free to ask.

John Sanabria · Answer

When you go to buy the MFR, you will typically speak with the listing agent and it's normal for them to provide financials for the property. Eventually, when you get funding from your bank, they will ask to see the leases from the units you don't plan to live in. They will take these documents as market rents, and will allow you to take 75% of their value into account as monthly income to help you qualify for the loan. No other paperwork besides their lease should be required. The bank will assume that the amount they are leased is 'market rate' and will assume that even if you lose those tenants, you should be able to rent them for 75% of what they rent for now. Even if the lease the tenant signed ends the week after your closing you will be ok.

The other really good thing is if you can look at the rents and you know that they are far below market, you will already know you can get much more for the units. If you already qualify with 75% of the rents, imagine if you can get 110-140% of the current rents. It just makes the deal even sweeter.

Nhia Yang · Answer

Thank you so much! I wasn't aware USDA has a multifamily arm.

Can you elaborate on adding 75% of rent to the income in consideration to FHA? I REALLY love your advice on leaving the fha loan in place until we have 20% so we don't have to pay PMI. What sort of records/papers would we typically be required to have for the rent in the other 3 units be considered as income? Did I need to have signed leases with an official move in date to prove they will be occupied, etc?

Nhia Yang · Answer

Thank you, Michael! I'm currently reading more on that mortgage interest deduction right now. We have a low household annual income of 38k. Appreciate your input very much!

Michael Rutkowski · Answer

This right here is what I'm talking about. I have no idea what rents are down there, but if you can't make that work, then it's not the right time for that market. Craigslist a modular, get your husband a hammer for his birthday and put him to work. I would rent out a nice modular for arounf $700 here (which would have 0% vacancy forever), and then sell it. Gotta start somewhere.

http://www.realtor.com/realestateandhomes-detail/6...

Michael Rutkowski · Answer

Did you read up on Trump's elimination of mortgage interest deduction? That's a huge hit for FHA shoppers. HUGE.

You can't just up and get those USDA loans. What's your income? Do you qualify for those? Those usually go to lower income, rural buyers, in tight markets (ie: no affordable housing because of no economy) The property also needs to be in a specific location in many cases. There are more regulations than that, and someone more qualified than me should be answering this.

When I had an FHA, the minimum was 2 years owner occupied, up to 4 plex, but times have changed quite a bit since 2007. With that said, no one from the bank ever knocked on my door. Once again, I don't know your income, but the bank's underwriters are definitely going to factor in the loss of the mortgage interest deduction into your ratios.

I would buy a cheap lot, get a manufacturer financed double wide, rent that out for now. Seems like many people are going to be in the poor house soon, and that will be in demand. Just a quick glance at the OK market shows me plenty of that available.

Is it possible to do FHA now and USDA later, or both?

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