Using fha loan at 3.5 % down then after repairs, cashing out the equity for investment?

Question

Hey everyone, so I'm not sure if this is possible or not, but I figured this would be the best place to ask. Right now I believe the only way I can obtain a loan for a mortgage is to get an fha loan. But they require you to live in the property for at least 1 year. My question is, what would be the best way to use this property as leverage for another deal.

1) use the equity in the house after repairs and updating is done to obtain a conventional with 20% down, for a flip? (If I don't have to wait a certain time to take out the equity in the house?)

2) somehow use revolving credit from the equity in the house?

If anyone could shed some light on the situation, I would greatly appreciate it!

Unless anyone has better ideas on how to make something work with an fha loan.

Thanks everyone.

Jon Holdman · Answer

Keep in mind that when you do a cash out refi on the property to try to get some money your LTV will be MUCH lower than the 96.5% FHA will do.  Probably no higher than 80%.  So you will need to force a lot of appreciation into the property to result in any cash back to you.

And, FHA requires the house you buy to be in VERY good condition.  You cannot use regular FHA loans to buy a junker and fix it up.  So your opportunity for doing something to increase its value is very limited.

This buy and refi strategy worked a lot better when prices were going through the roof during the bubble.  Much, much harder to make it work now.

Also realize that if you have 10% or less equity in a property, you have no real equity at all.  That's because you will have to spend at least about 8% of the value to sell a house.  Often more in the form of repairs before the sale or concessions to the seller.  Or both.  So when you buy a house with a 3.5% FHA loan you are underwater significantly from the day you close.  Better to think of these low down loans as "deferred down payment" loans.

Hattie Dizmond · Answer

If you get a property using the 3.5% owner occupied loan insured by FHA, you must occupy the property within 60-days of closing and for 12-months.

Generally speaking, in order to cash out any equity, you would need to have seasoned the mortgage on the property for a minimum of 6-months, 12 or more would be better.  Also, if you are looking to cash out refi the property into a non-FHA loan, you will generally need to have enough equity to keep the LTV at or below 80%.  That requirement may have some wiggle room, if you're dealing with local portfolio lenders.  But, you should at least plan on it.  You can create equity by forcing appreciation via your rehab work.

There are a lot of possibilities and a lot of moving parts.  If I were you, I would start by calling small, local lenders.  Ask to speak to the commercial credit officer.  You're trying to find a lender who services their own loans and keeps them on their own books, instead of selling them off.  These guys have a lot of latitude in their underwriting guidelines around the unsecured loans their originate.  You're going to want to find several of them and start building relationships with them, prior to the point you are trying to refi out of that FHA loan.  If you get the FHA loan through them, all the better.  You will have already established a track record with them of properly servicing your debt.

Good luck.

Jon Holdman · Answer

@Devin C. hard money lenders will not lend if you're moving into  the place.  That's a residential mortgage and highly regulated.

You have to live somewhere.  Doing a low speed rehab, assuming it will pass FHA inspections, is as good as anything for a place to start in rehabbing.  You can learn a lot doing that.  Get permits.  That, too, will be a lesson.

Just don't assume you're going to be able to get any cash back out of this deal.  At some point you might be able to refi and get some.  Just don't have that being essential to your plans.

Albert Bui · Answer

This is true in most respects Jon, however the value of a particular upgrade, feature, kitchen, or other is market dependent upon each area. To standardize the value of a pool or feature in one area cannot be used in another area at the same time, place, neighborhood, or part of the city. The appraiser will make adjustments based on comparable approach and derive a value for that kitchen, that pool, conversion from 1 car garage to two car garage, or carport to 1 car garage. The NAR report is just an average over all areas nationwide.

For instance I've seen a home with a car port in a neighborhood with all homes having atleast 1 car garage. If the home can be acquired 50k below the comparables all else equal  and the conversion costs 15k you can bank on a 35k profit or 233% return on your 15k spent for the conversion. It just depends on how much of a "spread," there is and many "like," comps are available to substantiate the value.

Before I do any projects I make sure to identify all my "sold," comps first or homes that are in MLS that are back up or pending and call the agents to get a feel for the settlement price so I can mitigate risk and project my "spread."

If a buyer knows the FHA health and safety guidelines to the tee they could in essence team a maintenance crew and loan officer (as an advisor) up to do the "minimum," amount of work during the escrow period prior to the FHA appraisal (assuming min repairs) being conducted and potentially close with a standard (non 203k) FHA loan. This would allow the buyer to have built in equity assuming cost to repair/rehab less than the ARV equity of solid comps. A quick min rehab team in this case could be indispensable.

Joe Impagliazzo · Answer

@Devin C.

Just remember your not going to get nearly what you spend in the appraised value.  Some people like marble counter tops, some don't etc.....  The appraiser will make adjustments for the new upgrades but the value is normally in the square footage unless a major rehab is done.  Also PM me if you want about qualifying for a conventional mortgage and why you don't think you qualify.

Devin C. · Answer

@Joe Impagliazzo the house is in livable condition right now. They put new windows in new roof and a new furnace, and updated all the electrical. It's an older couple that doesn't live in the house anymore. They just took 30k off their asking price because they are motivated to sell.

I feel what's keeping many away from it  is they don't want to stick the time and money  into renovating and updating almost everything in the house.

Joe Impagliazzo · Answer

@Devin C.

is the house is in decent condition your better off with a conventional loan is you can qualify.  You only need to put down an extra 1.5% than FHA, and you can avoid the FHA upfront MIP fee of 1.75%.

@Derek Woods

just make sure to look at the other sales in the area.  If the bank dropped it that drastically there is probably many foreclosures in the area and they just want to get out of it.  The problem will be when you go to refi after a minimum of 6 months, the comps in the area may still be foreclosures and  the value will still come in low

Derek Woods · Answer

I am very interested in this aswell.  I have found a local listing that was dropped from $59,000 to $29,000.  The bank that has it is looking to get out of it.  The house is in a very nice neighborhood within the best elementary school district.  4 Br 3 Ba 1500sqft brick.  The house does need some cosmetic clean up,  but I have not seen anything structural yet.

This house should, should have more then enough equity with a $10k remodel to pull this off.  My problem is their are no local banks "according to FHA site" that offer this program. I still need to start my phone calls.

Jon Holdman · Answer

@Devin C. I'm skeptical a plan to buy a house with an FHA loan, do some improvements, and selling it in a year will be profitable.  Again, when you sell a house you will pay a minimum of 8% in costs.  You will have some up front costs, too.  But the real problem is an ordinary FHA loan (not 203K) will require the house to be in too good of condition to make a good starting point for a fix and flip.  Fix and flips work when you start with a junky house and do some serious improvements.  FHA won't approve such a house.  Even if it needs updating, you may have a hard time getting back what you put in.  You can update a functional but dated kitchen, for example, and add value.  Trouble is, the value you add will be less than you spend.  NAR and others periodically publish lists of homeowner improvement projects and list the return on investment.  None are over 100%.  Many are much less.

A fix and flip works because the starting house is so bad owner occupants won't buy it.  When you turn a non-functional kitchen into a nice one you can add much more value than you spend.

Where this FHA strategy can work is to buy a house, live there a year or two and then turn it into a rental.  But you must evaluate it as a rental right up front.  Most houses make unprofitable rentals.  If that's your strategy, be sure the numbers work for a rental from the start.

Devin C. · Answer

@Clay Manship thanks clay I will send you a pm.

Using fha loan at 3.5 % down then after repairs, cashing out the equity for investment?

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