Would a seller finance disqualify me from the FHA loan?

Question

Hello! I am new to the forums, but I've been listening to the podcasts for over a year now.

My question is, let's say I'm able to obtain a sellers financing on my first property. Would this disqualify me from the FHA 3.5% loan, even if I didn't apply for a bank loan at all? Also, if it does not, how many seller financing deals can I do before I'm no longer eligible for the FHA loan.

I'm not sure if I completely missed this point during an episode, or if they've ever brought it up. Maybe they have, and I just cannot remember, either way; I'd like to know the answer. I've never bought a property, and I'm looking into *COMPLETELY* skipping single family as a first property, with the goal of house hacking a duplex or a (triplex preferably). I strongly believe, that this will allow me to grow my rental portfolio quicker, while simultaneously giving me more landlord experience.

Thank you for your help, I really appreciate it!

Wayne Brooks · Answer

@Dairon Ruano Yes, fha is not just for first time buyers.  As long as you are going to live in the property, and qualify, it doesn’t matter how many other properties you have.

Dairon Ruano · Answer

@Brenden Mitchum Yes, I'm really hoping it works out haha. Chattanooga is an interesting place, especially if you're the outdoorsy type haha. We're surrounded by some really cool mountains. Here is a friendly local tip in case you do find a deal in Chattanooga. Ooltewah, Harrison, and Collegedale are very desirable areas in this city; they've also seen lots of growth in recent years. Especially Ooltewah and Collegedale. I've lived here since 2006, and those are the only places I'd invest in, as a local.

Brenden Mitchum · Answer

@Dairon Ruano

That is a terrific plan! Honestly, that's really the best shot you have of making a seller finance deal happen right now: By building and maintaining relationships.

Keep in touch and let us know how it goes.

By the way, I love Chattanooga. Hope to own some property up there one day so we have places to crash for rock climbing trips!

David Hanson · Answer

Seller financing is completely "off the books" meaning its private and doesn't report to credit bureaus unless it is serviced by a bank for the seller.  AKA holds no effect on qualifying you for an FHA loan. You can only hold 1 FHA loan at a time.

I know a local banker that will do 15% down on investment property.

Happy to help if you need it. I am local.

Jonathan Frith · Answer

@Dairon Ruano I say as long the offer is presented at a reasonable price and you have everything lined up, you should be good. Keep growing that portfolio.

Jeffrey Holst · Answer

@Dairon Ruano I don't know that I would limit myself to only Ooltewah Collegedale and Harrison. I have no problem with those areas but I think there's a lot of stuff in Hixson, Eastridge, Red Bank, and North Georgia (particularly catoosa county) that's attractive as well.

I do think that Chattanooga in general is a stable market and a great place to invest I currently have about 70 units in Chatt plus a few commercial buildings. And have 30 more units under contract to purchase between now and February 15th.

Brenden Mitchum · Answer

Hey @Dairon Ruano, welcome to the BP community!

Love the plan to get started house hacking! Hopefully there is a decent supply of small MF where you are looking? These are much tougher to snag where I am than a SF with a mother-in-law suite. However, I'm with you - triplex over a SF any day!

Now, to your question, which is a very interesting one. First, I would say why not just go FHA? Yes, you can only have one FHA loan at a time but rates are incredibly low right now. How frequently do you plan on purchasing a new house hack? Every year? I say this because finding seller financing in a hot seller's market is incredibly tough.

Okay, now let's assume you did find that seller financing unicorn. I don't see how having this seller note would prevent you from getting an FHA loan in the future. What really matters is your DTI - and credit and income but we'll ignore those for now. So, as long as the debt associated with that loan is being paid with rental income, your DTI won't be impacted negatively. This applies regardless of the number of properties you own with seller notes on them.

Now, I could totally be missing something here but I just don't see how a cash flowing property with a seller note on it would prevent you from getting an FHA loan. Then again, FHA requirements and underwriters can be a bit funky at times haha

Hope this helps a bit. Please, feel free to reach out anytime if you have other questions or just want to chat!

Dairon Ruano · Answer

@Jonathan Frith Thank you for your input, it helps a lot!

Dairon Ruano · Answer

@David Hanson thank you for your advice. I really appreciate it!

Brenden Mitchum · Answer

Fantastic tip. Thanks @Dairon Ruano!

Would a seller finance disqualify me from the FHA loan?

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