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Updated 20 days ago, 12/16/2024

User Stats

16
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8
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Jacob Kurian
Pro Member
  • Homeowner
  • Miami, FL
8
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16
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Newbie FHA Loan

Jacob Kurian
Pro Member
  • Homeowner
  • Miami, FL
Posted

Hi guys. I'm a new real estate investor just looking to get more knowledge on how FHA loans work. If somebody wants to get an FHA loan, then eventually turn that into a rental (short term or long term TBD), how would that typically work? How long must you wait before being able to rent out a primary residence property from a lending perspective?

  • Jacob Kurian
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    Jonathan Greene
    Professional Services
    Pro Member
    #4 All Forums Contributor
    • Real Estate Consultant
    • Mendham, NJ
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    Jonathan Greene
    Professional Services
    Pro Member
    #4 All Forums Contributor
    • Real Estate Consultant
    • Mendham, NJ
    Replied

    You will live there for a year, hopefully get some equity so that when you refinance into a conventional, you can cash out, but in this market that is pretty unlikely. In short, you need to stay there a year as an owner-occupant and then you refinance into a conventional, rent both units and then you can use the FHA to do it again on a new one.

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    Zen and the Art of Real Estate Investing
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    User Stats

    420
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    294
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    Patrick Roberts
    Pro Member
    • Lender
    • Charleston, SC
    294
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    Patrick Roberts
    Pro Member
    • Lender
    • Charleston, SC
    Replied

    The short answer to your question is that the general rule is one year. I say general because unless fraud is involved, the loan likely wont be called if you move out of the property in less than one year. 

    The way the guidelines are written is that you have to intend to occupy the property as your primary residence when obtaining the loan, and this is generally demonstrated when you live in the property for at least one year. That being said, life happens, and the mortgage police are not going to come looking for you if something unexpected happens and you have to move out of the house before one year. For instance, things like death, divorce, job loss, natural disasters, heath issues, etc may cause you to change your plans unexpectedly and may change what you do with your home as a result. However, if you demonstrate that you're abusing FHA loans, such as getting a new loan after six months because you converted the property you just bought into a rental without a reasonable explanation, then you could have issues.

    Buying a home under the guise of a primary residence when you intend to immediately use it for a rental is technically mortgage fraud. It is very unlikely that you'll have problems/be investigated for just one instance, but repeatedly doing this will absolutely raise red flags these days. A very prominent loan officer in NJ was charged recently for helping borrowers do just this. 

    The issues with househacking-type strategies typically arise when you apply for a new loan. For instance, FHA guidelines are very strict and restrictive when it comes to using departing-residence rental income to qualify for a new FHA loan (such as the 100-mile rule). These rules are designed to prevent borrowers from repeatedly using FHA loans for investing. Also, any underwriter is going to heavily scrutinize a new primary residence loan application if they see that you recently (under 1 year) bought a primary residence in the same general area and have already converted it to a rental.

    Long story short, if you use an FHA loan to buy a property, you need to actually use it as your primary residence (move into it and live there) shortly after closing and continue living there for a year or so. From there, you should be good.

    Out of curiosity, why FHA?

  • Patrick Roberts
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    User Stats

    32
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    Stevan Stojakovic
    • Financial Advisor
    • Miami, FL
    17
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    32
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    Stevan Stojakovic
    • Financial Advisor
    • Miami, FL
    Replied

    Well, using an FHA loan to house hack could be a smart move. After one year of occupancy, refinancing into a conventional loan can remove PMI if you achieve 20% equity through appreciation or principal paydown. If you're considering BRRRR, the FHA 203(k) loan could work for bundled purchase and renovation, but it's often simpler to use personal funds for lighter rehab projects.

    You could focus on properties with strong rental potential and manageable upgrades to increase value. Always have an exit strategy in case refinancing takes longer than expected, such as optimizing rents or reducing expenses.

    Best regards, Stevan

    User Stats

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    Derek Brickley
    Lender
    Pro Member
    • Lender
    • Ann Arbor, MI
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    Derek Brickley
    Lender
    Pro Member
    • Lender
    • Ann Arbor, MI
    Replied

    Good question here, generally speaking one year is the expected timeframe before you would be able to purchase a new primary residence (also referring to how long you would generally be expected to reside there). It was mentioned above you could refinance into a conventional loan, however with the 5% down conventional primary residence loan on multifamily now chances are you won't refinance this FHA loan unless you plan on living there for an extended period of time and rates come down. Depends on your scenario exactly though, never one cut and dry answer to which is better.

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    Gold Star Mortgage Financial Group
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    Jonathan Klemm
    Contractors
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    Jonathan Klemm
    Contractors
    Pro Member
    • Contractor
    • Chicago, IL
    ModeratorReplied

    Hey @Jacob Kurian - I have personally used the FHA loans several times here in Chicago both as an investor and many more as a general contractor.

    However, we typically use the FHA-203k loan because it involves a renovation, which I highly recommend if you are looking to really boost your equity and have the cost of the renovation wrapped into your loan with a VERY LOW AMOUNT OUT OF POCKET.

    I like the FHA loan, but honestly, the Fannie May Home Style is an even better product at this point because you just have to bring a bit more cash to the table 5% vs. 3.5% (w/ FHA), but you have a bit more flexibility.

    Will you be buying Miami?

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    Quality Builders
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