FHA - First time buyer strategy?

Question

Hi All!

What is the difference between a FHA 3.5% loan and a conventional loan putting 5% down? From my understanding the FHA has more fees?

Is a good strategy to buy a fourplex with an FHA loan and then after a year, move and refinance that property into a 30 year fixed?

Anything to watch out with FHA loans?

Mike Rodriguez · Answer

@Cody Barna Thank you again! Question, I'm looking at a four plex with tenants. If I inherit the tenants, they're currently on month to month, can I send them new leases when I purchase the property?

Cody Barna · Answer

@Mike Rodriguez that's a great question, most of the time sellers are more apt to agree to your terms if you make a full price offer. It's a physiological thing, at the end of the day it could be the same exact terms just presented differently. This happens a lot in every day life, if an item is listed for $1.99 vs $2.00 you're more apt to buy it vs if you can buy two boxes of tissues for $5 or one box for $3.50, most people will think their saving money by going with the cheaper option. Same goes for real estate, if a couple list their home for $250k most of the time their agent has already conditioned them to believe they will receive a much higher offer. Lets say the home will need $10k in repairs, if you offer $240k they're less likely to accept it. When simply offering full price with a $10k credit at closing sounds more favorable. However considering how crazy the market is right now that's going to be tough to find, most properties are selling for well above asking price. As long as the numbers work I wouldn't be worried about a small difference in the closing costs.

Mike Rodriguez · Answer

@Cody Barna

Hi! Is it better to get a credit for repairs or reduction in sale price? My thinking is that it'll be less closing costs (because the purchase price is reduced), payments may be lower overall if I ask for a reduction in sale price?

What are your thoughts?

Cody Barna · Answer

@Mike Rodriguez that's a good question, typically the bank will only give you between 70-80% of the appraised value.  Even in the event that the market takes a massive hit and property values drop significantly, you should still have equity in the property. Even if there was some way to pull out 100% of the equity, I wouldn't recommend doing so unless you had a large amount of cash reserves.

Mike Rodriguez · Answer

@Cody Barna when refinancing I read that you should take out 65% so you have 35% equity minimum in the house so if the market drops 20% you will be safe. However, what does your equity have to do with the value of the property?

Jaysen Medhurst · Answer

Lending standards are stricter on a conventional mortgage, @Mike Rodriguez. Plenty here on BP and around the internet about how they differ.

Cody Barna · Answer

No worries @Mike Rodriguez, good luck with everything!

Mike Rodriguez · Answer

@Jaysen Medhurst got it! Then what is the different between the two? Is it just dependent on if you qualify for a FHA?

Mike Rodriguez · Answer

Thank you @Cody Barna!

Jaysen Medhurst · Answer

Low-down payment conventional mortgages are preferable to FHA mortgages (assuming you qualify), @Mike Rodriguez, because there is less paperwork, no up-front mortgage insurance (1.75%), and monthly mortgage insurance drops once you hit 78-80% LTV.