Piggyback(80/15/5) vs FHA Loan for Rental

[Mike Austin]

Hi,

I've been talking with my loan officer about financing a multifamily property in my area. She mentioned that I might have the option to use an 80/15/5 instead of a 3.5% FHA loan. This would get my monthly payment lower since there would be no PMI and allow me to improve my cash flow. Has anyone ever used this type of mortgage to finance a rental property?

Are there any drawbacks to this? I will have to take out two mortgages, so would this limit my ability to finance more properties in the future? Any thoughts from an investor perspective would be great!

[Eric Guiltinan]

@Mike Austin

I think the main pro for using an 80/15/5 loan for your first purchase is that it would give you the option for an FHA loan for your second purchase. Using an FHA loan for the second purchase is particularly useful because if you have good credit you can carry a significantly higher DTI. Since you will be living in your first place you will have to carry some debt when you go to qualify for your next place. This is basically what I did and it worked out well for me. If you goal is to buy several places you need to be thinking out at least one property.

Of course, leveraging yourself to this degree is also very risky.  You are much more likely to be underwater if the market turns around.  This means that getting places that have positive cash flow is incredibly important.

I wouldn't worry about limiting the amount of loans you'd be eligible for.  By the time that happens you'll be able to pay off the 15% or refinance out of it.