Multiple Conventional Loans with Less than 20% Down?

Question

Hi All,

I have a quick question I was hoping someone might be able to shed some light on. I currently have a SFH with about 30% equity and a duplex that I bought with 4% down and live in. I plan to buy more multi-units and owner occupy, but am I wondering, would I be able to buy future owner-occupied multi-units with 10% down, or would I need to put 20-25% down on all future purchases with conventional financing. Even with paying PMI, the cash on cash returns with 10% down should be higher than with putting 20% down, so that is what I would like to do. Will most lenders allow 10% down in this situation, or do they require 20-25%? Any advice is greatly appreciated, thanks in advance!

Albert Bui · Answer

I meant 7 financed properties total it doesn't mean they are 7 all financed by FHA and this rule only applies to properties all in a local or contiguous area.

Fha in general has no limits on the number of financed properties.

The only reason there is that rule above is to thwart people trying to take advantage of fha to build their rental portfolio. FHA was designed to help home ownership not to accelerate a borrowers accumulation of rental properties.

For most cases, a borrower can only have one fha loan at any given time. There are circumstances or exceptions that allow a borrower to get a second fha loan simultaneously and they are:

- when you've consigned on a fha loan with another borrower

- you're legally separated by divorce or by court and need to use fha to purchase a new home

- your family size has increased such that you've put out grown your current fha loan/home

- your employer has relocated you to a new location such that you'll need to use the fha program again to purchase a new home

Hopefully that helps.

Account Closed · Answer

Sorry to revive an old thread here, but something stated by @Albert Bui struck me as very interesting.

"With FHA its 3.5% down with up to 7 financed properties 1-4 units max." - I was under the impression FHA and its 3.5% down could only be used once. Maybe I am misunderstanding your statement about FHA loans.

I have my first owner occupied duplex under my belt for about 9 months now - it was financed with an FHA loan. I've been saving for down payments for my next duplex, but the down payment is keeping me away. Could you elaborate on what you said in regards to FHA? (or any avenues I could pursue to get another property in less time.)

Thanks in advance!

Albert Bui · Answer

On FHA I can use them, it just depends on the bank you work with or product you're working with. With VA financing on primary homes the vet needs to have rental experience to use rental income. The definition for "rental experience," is loosely defined so there are ways to document this.

Some banks will add overlays on top of the base level rules.

Albert Bui · Answer

Why? they are fannie guidelines no particular reason except for the note needs to follow guides in order to be sold to fannie. Lenders usually dont fund with out being able to have some liquidity for that note on the secondary market.

The live in 12 months or 1 year is a FHA / VA financing requirement.

On conventional it just says you'll agree to live there as a primary residence. (general guide is 6 months + but as a safe rule of thumb 12 months or more).

Okay with living there 1 year yes, but its a human decision as long as your story is in align with what you portray then yes its "good." If the underwriter senses its not a real primary or you dont intend to occupy then you'll have a touch time getting an approval.

Tim Porsche · Answer

Thanks for the replies @Albert Bui and @Jaysen Medhurst. What you are saying makes a lot of sense.

Albert do you know why duplexes are 15% down but tris and quads are 25%? I can understand why any multi would require more down than a SFH...there are less buyers for these, and the buyers out there are investors who are going to want a great deal, so they would be harder for the bank to get their money back on if they have to foreclose, but I don't understand why duplexes are 15% down and 3-4 units are 25%?

Yes I agree, John Schaub advises getting loans with 10% down from sources other than banks. I just wasn't sure if banks would do 10% down as well on multiple properties.

By the way, you are only required to live in a multi-family (or any house) for one year before you've fulfilled the terms of getting owner-occupied financing correct? So if you live in the place for at least a year, then go somewhere else as an owner occupant, banks are okay with that right? That was the assumption I was under from reading other's posts online and a few different books.

Albert Bui · Answer

It would be hard to convince an underwriter that you're going to buy another multi unit as a primary however is it possible? Sure if it makes sense it all depends on how you craft the story however its not likely because you're already living in a multi-unit as a primary.

As for down payments duplexes are 15% down min as primary and 25% down min with 3-4 unit on purchase.

With FHA its 3.5% down with up to 7 financed properties 1-4 units max.

Putting 10% down is fine depending on how you buy you could use 10% down in various ways then use conventional or fha or other financing later for permanent financing.

I've read building wealth one house at a time his basic premise is buy with 10% down buy that was written in a different time when those products were available if we're referring to conventional financing. Nowadays 10% might be hard, private, seller financing, etc and if you buy right you can take out that note with conventional or FHA if you live in the property.

lots of ways to make things work.

Jaysen Medhurst · Answer

@Tim Porsche, happy to expand as best I can

1) Not positive on the exact percentages ( a quick search should clarify), but I think it's usually 75% for conventional financing and a bit higher, maybe 85%, for FHA. You mean tax returns from the person you're buying from, right? That should work.

2) I saw this on FHA loans, which says you can have multiple, but only 1 can have an LTV above 75%. The reason banks require 20%+ down is that they want to be sure there is sufficient reason for you to keep paying. This is especially true if you don't live in the property.

Yes, it is still risky for banks even with PMI. That's insurance, which the banks don't want to use unless it's absolutely necessary. They waste time, effort, and money every time they have to foreclose.

You definitely won't be able to do 10% down on apartment complexes. Anything 5 units and above is considered commercial and has stricter financing requirements; 25%+ DP, higher interest rates, shorter amortization.

Tim Porsche · Answer

@Jaysen Medhurst Thanks for your response on this. Could you just clarify a couple of things please?

1. You said they only count a portion of your rental income for the debt to income ratio. Could you elaborate on that? Roughly what percentage of rental income do banks count? I know they want to see at least one or two years of tax returns before they will count it as well right?

2. When you say eventually I would run into trouble only doing 10% down, do you think I could still get at least 3-4 good multi-unit properties with 10% down before running into issues? Assuming they are all strong on cash flow, I live in each one for a year, and have steady full-time job income. This may be a dumb question but looking at it from the bank's perspective would it really be very risky for them since they would have PMI coverage for those loans? Eventually what I may do is pyramid up...trade 4 multi-units for two small apartment complexes or something like that. I'm not entirely sure yet.

I had originally planned on doing 20% down for future properties, but ended up reading Larry Loftis' "Investing in Duplexes, Triplexes, and Quads" and also John Schaub's "Building Wealth One House at a Time" and they both advise not putting more than 10% down when interest rates are low, to really take advantage of leverage, which makes a lot of sense to me. All of this is of course assuming they are good deals and that I would still cash flow well after all debt servicing, fixed costs, and a liberal allowance for maintenance\repairs, capex, and vacancy.

Jaysen Medhurst · Answer

Hi @Tim Porsche, eventually you'll have trouble continuing to do 10% down on future properties. Lenders are going to get wise fast and with a low DP your Debt to Income is going to go up fast (remember they won't count all of your rental income, only a part of it).

You might be able to work something out with a local/community bank. I would start shopping around to them and build relationships with the folks in commercial mortgages. Tell them what you want to do and see what they say. Local banks that don't sell their loans to Fannie/Freddie have a lot more flexibility.

The key is if (when) they say no, get clear guidance on what would make it a yes. Bigger down payment, lower debt to income?

Good luck.