FHA to conventional on a rental unit?

[Michael McDermott]

I currently own a single family attached rental unit in the suburbs of Philadelphia. I bought the house using an FHA loan, the house was appraised at 125 in 2009 and I took out a loan of 117. Last September I turned this into a rental unit which I am making about 300 a month on and using part of that to pay down the principal. My equity is at about 15% right now. I would like to buy a duplex in the near future but cannot afford the down-payment of anything above 5% really, so my idea is to convert this FHA loan into a conventional loan so I can use the FHA loan again to purchase a duplex for me to live in and rent out the other half.

Does this idea make sense? Would anyone advise against this? Is there a better option that I am not exploring?

Thank You.

[Albert Bui]

Originally posted by @Michael McDermott:

I currently own a single family attached rental unit in the suburbs of Philadelphia. I bought the house using an FHA loan, the house was appraised at 125 in 2009 and I took out a loan of 117. Last September I turned this into a rental unit which I am making about 300 a month on and using part of that to pay down the principal. My equity is at about 15% right now. I would like to buy a duplex in the near future but cannot afford the down-payment of anything above 5% really, so my idea is to convert this FHA loan into a conventional loan so I can use the FHA loan again to purchase a duplex for me to live in and rent out the other half.

Does this idea make sense? Would anyone advise against this? Is there a better option that I am not exploring?

Thank You.

 Hi Michael,

Not only will you need to qualify DTI (debt to income) wise but you'll need a min of 80% LTV (Loan to Value) especially on an investment property. The prudent path if you were properly guided would have been refinancing into conventional financing prior to converting the property into a rental on paper(filing as rental on tax returns) or in actuality (getting a tenant). The LTV requirements are much less restrictive on conventional financing when the subject property is a "primary residence." This is what I generally advise my clients do.

The problem now is if you're at 85% LTV you could do a couple things to refinance with out mortgage insurance:

- bring in additional 5% equity pay down to bring your loan to 80% and refinance (then you may not have funds to buy another FHA property).

- wait till a comparable sale in your neighborhood would allow an appraisal value to come in high enough to make your current loan balance, 80% LTV

Let me know if this helps.