FHA - Maximize Low Down Payment?

Question

Hello, BP. First thread posting, so don't be too hard on me!

I am looking to invest in my first real estate property in the next few months, and I hope that this property will be one of many to come. My plan is to use a few FHA loans on duplexes over the next few years, until I am tired of moving once per year!

My original target price range for a duplex was about $150k - $225k, but because I was having some difficulty finding properties at that price level that I was interested in living in, I began to up my search to something in the $300k range. I was initially reticent to moving up my price range, but as I began to think about it, I realized that I will only have 2-3 opportunities to make 3.5% down payments on properties, and as such, it may make sense to make this low down payments on expensive properties. The 16.5% delta (between a 3.5% down and a 20% down) on a $150k purchase vs. a $300k purchase is quite large.

So, my question is this: what are the downsides to this strategy? Might this severely impair my ability to attain financing in the future? The obvious upsides are that I have a better living situation, I am building more equity through a more expensive property -- both through equity pay down and likely appreciation, and I am likely setting myself up for better tenants in the future.

I'd love to hear some thoughts/critiques on my thought process here. I want to make sure I am not missing something fundamental.

Thanks in advance! Aaaand sorry for the long post.

Alexander Lang · Answer

Hi @Garrett Woetzel! Welcome to BP!

Yeah Duplexes in MN can be kind of pricey. Where are you currently looking, down in the south metro, north metro, ect? I think you have the right idea to house hack while you and the misses live in one side and have someone else pay your mortgage. Yeah the FHA loans can be cumbersome that's for sure. Have you ever looked into going the conventional 5% down route? I am not familiar with multi-family financing so maybe someone else can chime in on this, but maybe that would be ideal so when you hit that 20% LTV your PMI would drop off versus the FHA loan that sticks the PMI on the life of the loan? Just an idea. Keep at it! Feel free to drop me a line whenever, I am down in the South metro now as well as of two years ago and still new to the area (coming from Northern metro)

Thanks!

Alexander Lang

Garrett Woetzel · Answer

That makes sense. It has been a challenge trying to get solid information on FHA loans, as it seems like quite a bit of policy is left to the discretion of the lender. Looks like my strategy will revert to an old-school one!

Marc M. · Answer

Keep in mind that FHA loans are designed for owner occupants but I believe you can still qualify up to a quad (someone correct me if that's wrong) as long as you live in one of them.  You'll be signing papers attesting to the fact that you'll be an owner occupant and your mailing address will need to remain the property address, at least for the mortgage.

You certainly could use FHA as an investor but then you're getting into dicey territory since, you know, it's fraud.

Garrett Woetzel · Answer

Do you hear that silence? That's the sound of the wind being taken out of my sails...

The ideal scenario -- revised upon this new and disappointing revelation -- would be to have my wife take out an additional FHA loan in a year (she will not be a co-borrower on this first loan), so I think this scenario would at least allow for two simultaneous FHA mortgages.

Assuming this scenario is feasible, I am still wondering if aiming for the higher end of the price spectrum might be a good strategy for these low-down payment loans.

Wayne Brooks · Answer

Yep, you'd have to refi out of one FHA, to get another, and that means you'd need 20-25% equity if you didn't want to put any more cash in.  You'd have a 2 year wait in between new FHA loans also.

Nicholas Myers · Answer

Hey @Garrett Woetzel,

You are only allowed one FHA loan at a time. So you would only be able to take advantage of the 3.5% down payment once, unless you sold each property prior to purchasing another.