Does an FHA loan make things difficult?

Question

I'm in the beginning stages of looking to buy a multifamily in the 100-200k range (or <100 if I decide to try a renovation). Haven't decided on a market yet. Has anyone had experience with using FHA loans, did it hinder your buying process at all? Same question for a FHA 203k.

Wondering mainly due to FHA having its own definition of what is acceptable, if that causes sellers to shy away from FHA offers.

How about conventional 5% owner/occupied or the fannie mae reno loan, are lenders who offer this hard to find? I have decent enough credit to qualify, wondering what the benefit to the FHA other than lower credit score reqs is.

Albert Bui · Answer

FHA and 203k FHA loans dont necessarily make things more difficult but it does have its challenges because of the realtor/agent's perceptions of what FHA is, how long FHA takes to close, 203k FHA's, and what their experience has been in the past. When you're using FHA variants you'll have to combat that "perception," and if the perception is good then you dont have any challenge so its just case by case depending on the seller and the agents involved. Are there actual challenges with FHA ? sure it requires more disclosures to be signed like FHA Cert/amend that needs to be signed by all parties and for older buildings you'll need Lead based paint (LBP) disclosures signed by all parties and these arent physically hard things to do but it shapes the perception of the seller of more perceived risk if there are no professional lenders or agents present to explain and massage these forms in the psyche of the seller/buyer conversation. Are there repairs to FHA that make it more difficult ? Sure sometimes FHA is more picky on the condition of a building/property so you might have a bit more repair items to do before you can clear your appraisal to get your file CTC or cleared to close (aka the stage where you can actually order loan docs, sign, fund, record). There arent that many more items than a typical conventional loan but FHA is more picky on repairs so agents get annoyed with FHA sometimes becuase these items make their escrows slower to close (more items to do repair, negotiate, before they can close their escrow and make their commissions). So all in all if you know what you're doing and have professionals all of the above arent that much of a hinderance and we close these all the time but we're pre-emptively working ahead of the actual incident of issues to make sure all parties informed with the proper expectations. @Matthew Kwan @Carlos Valencia @Kin Meng Sio

Ana Kehoe · Answer

FHA loans are less flexible with their guidelines when it comes to AUS (automated underwriting system). Banks are using Fannie Mae and Freddie Mac's automated system to underwrite the file and tell borrower how many months bank statements/ years of tax returns and W2 they have to provide). FHA usually ask for more documentation, but AUS can approve FHA loan with DTI above 50%! Compare to conventional loan's DTI max - 50%. I would highly recommend to ask your lender to run AUS for both FHA and conventional and tell you exactly what you have to prepare to close your loan without any unexpected conditions.

Maylin Cuello · Answer

I've never used an FHA loan, but have been considering it as I am a first-time home owner that wants to house hack and I am trying to keep my down payment as low as possible. From my research, FHA loans do require a lot more work than conventional loans. Some sellers may also shy away from accepting an FHA loan offer just because of the requirements involved. Have you heard of Matt Porcaro (The 203K Way)? He has an ebook that is ALL about using FHA and FHA 203K loans specifically for house hacking and eventually BRRRR. He also posts a lot of information on FHA loans, how to find lenders and contractors that will work with FHA, and even how to find deals that will accept FHA.

Dave Skow · Answer

@Dan MacDonagh- some sellers tend to shy away from FHA because : 1) FHA appraisals can be a bit tighter on value and required condition than conventional appraisals and 2) the FHA underwriting process can be a bit tighter too .......if buying multi family and planning to live in it - FHA is the program to use as conventional options will require larger down payment

Clayton Plummer · Answer

With FHA (either normal or 203K) you'll pay Prime Mortgage Insurance (PMI) and that can kill your cash flow from a property. NOT A SHOW STOPPER, but something to put into your calculator as you evaluate properties.Typically, PMI will be on any loan product that is less than 20% down, depending on your local lender. Talk to your local lender and let them know up front what your intensions are with the property you are trying to purchase.I've not used the 203K loan, yet. However, I've heard it is tough to get contractors to work with you when using this process because you have to get 3 different quotes for every piece of renovation. Again, not a show stopper, but something to consider.The positive side is you can possibly (talk to your local lender) use a contractor for the "safety" stuff like plumbing, electrical, etc. Other things, again depending on your lender's rules, can be done with sweat equity (DIY).The difficulty with any Freddy/Fannie product (FHA/203K is a F/F product) is your local lender doesn't keep it in house.Also, with normal FHA you have to use it to buy your primary house. It is not an investing loan product. However, you can house hack a 1-4 unit place with a FHA loan.The 203K loan, again depending on your local lender, can be used to buy an investment property. However, there are typically rules with the maturation of the loan (so you cannot just BRRRR (specifically the refinance "R") or flip a property quickly with this product).Finally, after a calendar year of maturation (12 months) you can refinance out of the FHA loan (with a 20% down payment and closing costs) and get out of the PMI.Good luck!!