Is FHA worth it?

Question

I was reading a post about the new FHA regulations and wanted to ask the forum's opinion.

From my understanding PMI is now required throughout the life of the FHA loan. Even if you build enough equity to break the standard 25%? Can you wipe out the PMI if you re-fi into Conventional?

I'm looking to buy my first property and I'm looking for multis between 2-4 units. I'm in a situation where I have enough money to afford a conventional loan but I would like to supercharge my ROI with an FHA. Plus going conventional would take a large bite out of my cash reserve. From my understanding 5% conventional loans are only for SFH right?. I'm worried that when it comes time to re-fi that rates will have risen so much that it wont even matter.

The question to the forum is with the new regulations being put into place and rising interest rates is FHA even worth it?

Alcides Brown · Answer

Hello Joseph; To answer your question: Its all depends on your situation (resources) and what type of property you are buying, that will determine which loan product is best for you. If you compare FHA with Conv for a SFR, FHA allows for a non occuping borrower, conventional doesn't (this is big). FHA allows for a 6% seller concession  (1 to 4 units), conventional allows only 3%, FHA allows for 100% gift funds,  conv is limited. When you move to a two family unit, conv has price adjustments FHA doesn't, FHA allows for 85% of the rental income, conventional allows 75%, ( this income diff could be a factor in qualifying). When it comes to purchasing a 3 or 4 family dwelling FHA requires cash reserves, I believe conv does not, however the adjustments are also higher. In fact conventional has all types of pricing adjustments depending on credit score, # of units, type of property, down payment and more. FHA also allows for a FHA streamline refinance (great product), conv doesn't. So to determine which loan product is best for you I suggest that you get a comparison from a knowledgeable loan originator of FHA, conv or any other loan product for your specific purchase ( your personal information, property information, along with your future goals). There are qualifying and cost differences between products that are not presented up front to the average borrower that could play a factor in which loan you decide to use. The loan that gets you an approval and meets your needs is the best loan for you, maybe not for someone else but for you. Good Luck and have fund.

Jerardo Linares · Answer

Newsflash: All lenders will have to abide by all those guidelines starting in 2014. Its called Qualified Mortgages. Wells Fargo's guidelines have been in place for a reason: the whole lending market is heading in that direction. Now starting in 2014 you can go with a broker that is inexperienced in Qualified Mortgages, or an experienced, established lender.

Joseph Weisenbloom · Answer

Steven you are both right and wrong at the same time. For example say you have 20k saved up and you have the option of one property that you invest 20k and you get a 1k return and another property you invest 10k and get a 1k return. You are right that both properties are equal in the amount of "actual money" made. The difference is that in the latter scenario you have another 10k to invest into other opportunities which can bring in an even higher total return.

So if you opt to use a lower down payment in an FHA loan the money saved can be invested in another property for an even higher return than if you just invested everything into one property. Plus keep in mind that cashflow is not the only measure of return you still have equity buildup, tax write offs and appreciation.

With all this financial mumbo jumbo being said I totally agree that cash on cash return is the only important return because all those other measures of return are delayed and wont be realized until you sell the house or do your taxes. Equity build up and tax write offs wont pay your bills every month in a practical manner only cash on cash will.

The main reason I'm pursuing a lower down payment isn't for ROI but for a cash cushion because this is my first property and the chance of me messing something up is pretty high. Hopefully I did a good job of explaining this. Frank Gallinelli does a much better job of explaining in his book "What every real estate investor needs to know about cashflow and 36 other key financial measures" I woud reccomend you listen to him and ignore my ramblings :)

Steven J. · Answer

Maybe I'm ill informed but I personally don't believe the ROI means anythings regarding the actual money made from the investment. ROI is a way to compare apples (stocks) and oranges (real estate) to see how the two strategies of investing stack up against each other. As I'm talking about using FHA with the low down money I'm having a tough time making a decent cash flow out of the deal because there is so much, perhaps too much, leverage. While your ROI may go up what matters is the cash on cash return, I think.

Joseph Weisenbloom · Answer

Never done an FHA multifamily? Wow. Yea its funny when talking with lenders because they are so focused on selling to the typical retail buyer that they don't realize the potential for investors.

I should have enough for a regular 25% down payment but that would burn through my entire reserve. I would rather pay a smaller down payment and have a cushion for repairs, emergencies or unexpected costs. Plus a smaller down payment means a higher ROI.

Steven J. · Answer

@Joseph Weisenbloom , I'm in the same boat with lenders not mentioning the 5%. I've brought it up and its only applicable to SFH, not multi. I've got the same strategy as you. I actually saw a lender today who does work with investors, but he's never done an FHA multi family O.O. where he's included the rent as part of the funds that could pay back the loan. I liked his methodology and that he was very conservative, but he seemed leery of using incoming rent as part of my income. That was a new one. Luckily, he's willing to work with it. He's got another investor who he's done 44 deals with just this one investor, just not as many down the FHA road.

My biggest thing is I need to come up with the down payment and cash reserves at this point to make my numbers work and for the bank to feel comfortable lending to me. Its frustrating, but he says I'm close and we could make it work.

Sam Craven · Answer

@Joseph Weisenbloom I would recommend you do both.  Our bank will do things for us that that a mortgage broker cant (commercial LOC for our flipping, commercial RE Loans, networking ect), and our broker does things for us on the SFR side that the bank isn't proficient at.

Joseph Weisenbloom · Answer

Good discussion guys I appreciate the response. @Jerardo Linares Yes I plan to live in one of the units and rent the others out. from the lenders I have spoken to before none of them have offered me 5% for multi-units.

@Sam Craven I have considered using a mortgage broker but I'm not sure if that would be a better approach rather than building a relationship with a local bank/credit union. I see that you are a fellow Texan would you have a recommendation of a Mortgage Broker or a way of finding one? What do you think of online brokers like lendingtree?

Jerardo Linares · Answer

Having established relationships will definitely help your business. I am aware of the "red tape" put in place by bigger banks. A lot of times, speaking from experience, I find it comes down to the experience and lending knowledge of the individual Loan Officer. I've done deals for the same customer that another loan officer was unable to. Whether it was a major bank or broker. It just comes down to having the right knowledge to get the deal done.

I'm glad you have found a parternship that works for you. Make sure they are prepared for whats to come.

BTW its Jerardo....... But no hard feelings :)

Thanks for the welcome!

Sam Craven · Answer

Jared,

Welcome to BP.  I just looked at your profile and saw you are a lender with WF.  Its always great to have another lender on here with an understanding of the lending landscape.   My point is not to demean WF.  It is to simply state our experience in the market with WF on the buy or sell side has not been a good one, and a lot of my colleagues in the business in Texas share the same sentiment.

Also, I do not think it is fare to say that all mortgage brokers, not backed by a big bank are inexperienced or unestablished.

I am not a broker but I am intimately aware of the guidelines that all brokers must follow.  I am also aware of the red tape and bureaucracies that big banks put in place to protect themselves that are cumbersome on people like me and my customers, who don't fit the mold of the "typical" buyer.  Its for these reasons we work with the smaller and more agile brokers (and banks) that focus on customer service, repeat business, and logic and understanding of the deal.

Is FHA worth it?

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