Refinancing hard money structure to allow for a FHA loan

Multi-Family and Apartment Investing
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Refinancing hard money structure to allow for a FHA loan

Raymond Wu
Investor · Stratford, CT · Member since 2016 · 6 posts · 2 votes

Hello BP community,

I’m a young engineer and just moved to Connecticut for work. Graduated in 2015 and want to begin investing in real estate.

I recently just purchased a multi-family house (4 units) last month using a hard money loan due to some initial mistakes with the financing part of the deal. Now, I'm in the process of refinancing the hard money loan. I plan on purchasing another property later this year using an FHA loan.

Questions:

How should I structure the refinancing of the hard money loan? Which will still allow me to take out an FHA loan to purchase another property this year?

What are some limitations to an FHA loan? Monetary gifts? 4 multi-family units qualified?

Any additional thoughts/suggestions/criticisms are welcome and will be appreciated. 

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Mat O'Grady
Investor · North Stonington, CT · Member since 2014 · 393 posts · 228 votes
9y

Hello @Raymond Wu, welcome to the site!

I am not a mortgage broker, but I believe as long as you do not have an FHA mortgage already and you plan on living in the house purchased with the FHA loan, you should be able to do it.

One thing that might cause a hiccup is that your income needs to be able to cover the mortgage on your first property and the new mortgage and I believe you need 6 months of reserves to cover the mortgages. I also believe that the income from your investment property does not help until you have two years of doing it, but that may be wrong.

What does everyone else have to add?

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  • Mat O'Grady
    Investor · North Stonington, CT · Member since 2014 · 393 posts · 228 votes
    9y

    Hello @Raymond Wu, welcome to the site!

    I am not a mortgage broker, but I believe as long as you do not have an FHA mortgage already and you plan on living in the house purchased with the FHA loan, you should be able to do it.

    One thing that might cause a hiccup is that your income needs to be able to cover the mortgage on your first property and the new mortgage and I believe you need 6 months of reserves to cover the mortgages. I also believe that the income from your investment property does not help until you have two years of doing it, but that may be wrong.

    What does everyone else have to add?

    1Reply
  • Stephanie P.Pro Member
    Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
    9y

    @raymond wu

    Sounds like you are a prime candidate for a regular mortgage on the 4 unit if you live in one of the units.  You should be able to refinance the purchase price (no cash out) immediately and cash out after 6 months.

    Why do you want to use FHA?

    I just dropped you a colleague request.  Please accept.

    thanks

    Stephanie

    @Raymond Wu

    0Reply
  • Seth Williams
    Real Estate Broker · Winthrop, MA · Member since 2014 · 260 posts · 199 votes
    9y
    You should be able to do fha just fine for the new prop but you'll have to refinance the four family multi unit as owner occupant first and the maybe fha will let you go to a three or two next - could you buy fha while the other prop is still hard money and refi after as investor loan? You will need good equity.
    1Reply
  • Scott Hollister
    Rental Property Investor · CT · Member since 2015 · 400 posts · 432 votes
    9y

    Hello and Welcome to CT @Raymond Wu!

    I have a few questions: 

    • How were you able to purchase a primary with a hard money loan in CT? (I've heard that this isn't "possible" but maybe I received incorrect information?)
    • Did you do any work to the property to force appreciation and create equity? The reason I ask is that it will be cheaper to do a cash out refinance at 80% LTV.
    • What would be the benefits of FHA for you? (Low down payment?)
    • It seems like you went the expensive way with hard money first? Unless the property needed work. But there is also the 203k rehab loan that might of been cheaper (more hoops to jump through). 
    • I also don't know the rate you paid for HM and I would assume there were points? 

    Advice: 

    • Forced Appreciation to cash out refinance at 80% LTV:
      • This way you can avoid paying PMI
      • You are able to pull your money back out of the deal
      • You can also use a HELOC (Up to 100% LTV in CT) for your next deal. Just an option, choose the best investment for you.
    • Like @Mat O'Grady said, you can only have one FHA loan at a time unless you have extenuating circumstances. Example: Relocate because of a job. Check with @Kit Crowne on this, he knows his stuff:)
    • Mat is also correct for reserves on the property, this is a problem I ran into. You only need 2 months reserves for primary and 6 months for each investment property. (Conventional financing)
    • @Seth Williams that would be great but I don't think its going to be possible to buy an FHA with a HML currently out. I would assume, and I may be wrong (Kit can offer his wise advice) but they look at HML as short term loans with a HUGE balloon payment at the end of the term.

    Good luck Raymond! 

    1Reply
  • Raymond Wu
    OP
    Investor · Stratford, CT · Member since 2016 · 6 posts · 2 votes
    9y

    @Scott Hollister , Thank you for your response and advice!

    To address your questions:

    The home was purchased as an investment using hard money. I made a few rookie mistakes initially that forced me into a time constrained situation, and the only way to save the deal was to go hard money. Initially, it was supposed to be an owner-occupant loan.

    The property was in fairly good condition when purchased, so no work has been done. However, my property manager suggested some work/repairs on the property, but I’m trying to do the work/repairs after the refi process just because the high mortgage payments are really eating into the cash flow of the property.

    I want to use an FHA loan because of the low down payment requirements. I don't really have much cash after the expensive closing cost on the hard money loan. I'm not very familiar with the 203k rehab, but will look into it.

    The terms for the HM loan are: 6-month loan, 10% APR, and 5 percentage points with no pre-payment penalty.

    Thanks,

    Ray

    1Reply
  • Mindy JensenPro Member
    BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
    9y

    Hi @Raymond Wu . I don't think anyone addressed your initial question about the FHA loan. You can only have one FHA loan, unless you qualify for another with a pretty strict set of rules, such as you've moved more than 50 or 100 miles away from the original home for work.

    If you are refinancing the current HML with an FHA loan, you won't be able to use the FHA loan again until you refinance the original FHA loan into a conventional loan.

    FHA is for owner occupied. You have to sign a statement at closing that declares you will live in the property for the next 12 months. If you do not plan to live there, don't get the FHA loan. That's considered mortgage fraud, which is a felony.

    Conventional loans come with low down payments too, but the low downpayment option is for owner occupants, too. If you're living in one of the units, that counts. Up to 4 units can use a residential loan, 5 or more is a commercial loan.

    You can have a monetary gift for a down payment, but the giver has to sign a document that says they don't expect to be repaid. I think if the gifted amount is in your account for 3 months, it's considered yours and you don't have to account for that. Check with your lender.

    FHA loans come with FHA appraisals. The FHA appraisal sticks to the property for 4 months, meaning if you get a cranky appraiser or for whatever reason the property appraises low, you are stuck with that amount for the next 4 months.

    [email protected]Podcast Guest on Show #261
    BiggerPockets
    1Reply
  • Raymond Wu
    OP
    Investor · Stratford, CT · Member since 2016 · 6 posts · 2 votes
    9y

    Thank you for your response, @Mindy Jensen 

    The plan is to refinance the current HML with an investment loan, then to use an FHA loan to purchase the next multi-family and live in one of the units.

    What would be the lowest down payment requirement for a conventional as opposed to the 3.5%FHA loan for multi-family properties? Would a PMI be required for the conventional?

    Any thoughts on this strategy? 

    0Reply
  • Mindy JensenPro Member
    BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
    9y

    Hi @Raymond Wu . I believe the lowest down payment is 3% or 5%. PMI is attached to any loan with less than 20% equity, so while that stinks, if the deal is good enough it isn't such a big thing.

    FHA comes with permanent MIP (FHA's version of mortgage insurance) while conventional loans allow you to cancel it once you reach 20% equity.

    Do you have a lender you're using? Lenders have a bit of leeway, so this would be a question to ask your lender specifically.

    [email protected]Podcast Guest on Show #261
    BiggerPockets
    1Reply
  • Raymond Wu
    OP
    Investor · Stratford, CT · Member since 2016 · 6 posts · 2 votes
    9y

    Thanks for the clarification, @Mindy Jensen ! Seems like the conventional loan is the way to go. I don't have a specific lender, any recommendations are greatly appreciated! 

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