Take advantage of FHA or not

[Christian Estrella]

Good Afternoon All,

Before COVID, I was looking in the NJ (Elizabeth and Newark) market for a multi-family property. I wanted to take advantage of my FHA and house-hack as an owner occupant. My credit is at 650, due to an old collection and late student loans (-__-), FHA was perfect for me because of my low credit score. I have been working with a credit repair company to boost this but it is slowly working.

I have been reading that the lending guidelines have gotten stricter with the this pandemic, they are looking at higher scores, reserves, etc.

My question is:

1. Should I wait to build my credit score and make use of my FHA loan, even though it might take a while. (This strategy requires a househack)

2. Buy an investment property with conventional financing or an off-market deal with cash/credit, to use the BRRR method, and forfeit the chance to use FHA. (This strategy i would not house-hack, as I am living in queens NY)

I been waiting on the sidelines and would like to make a move sooner than later.

Any insight is appreciated. Thank you.

[Charles Xia]

Hi Christian,

As @Abel Curiel said, you don't have to wait for your credit score to improve as you meet the minimum for the FHA loan. All this really depends on is you finding a lender that will work with your current state.

I few warnings I would like to provide, if you are putting less than 20% down with FHA there are a lot of monthly fees that FHA requires you to pay. If you are just using it for the lower credit limit you should be okay in avoiding the fees. This will affect your cash flow, monthly payments, all of that, so just be careful. Most people take advantage of FHA because of the lower downpayment option. Also, because your credit score is low you're going to get higher rates. 1-2% increase in the rate would cost you a lot more money in the long run. I don't know what your current trend of your credit score increasing now is but if it pays to wait another month or two for your credit score to get into the good zone, it is worth it.

I would suggest see what comes first, work on your credit and if you find a property, can take advantage of FHA, set up a lender that will give you a loan, and close on the property then that's great. It might take you a longer amount of time to find a property now due to COVID-19. There's less people at work, less people giving out loans, limited real estate agent interaction.

In other words, If you find one that takes advantage of FHA great! If you don't your backup plan is still to work on your credit and do it with a conventional loan. You don't lose anything because you still have a backup plan.

I hope this helps,

Happy Investing,

Charles