FHA (2-4 unit) Question/Recommendation

[Trentan Moore]

Hi Guys,

My business partner and I are looking to take advantage of the low money down option of using an FHA loan to purchase a 2-4 unit property in the Pittsburg area. I would be the owner occupied resident that has to live there for 1 year. As we were going through the pre-approval process my lender informs me that FHA requirements are to put 25% down. This completely contradicted everything I have read/researched about FHA as a house hacking investment strategy.

I was wondering if anyone could clarify this and was also looking for a recommendation for an investor friendly lender in the Pittsburgh Area so we could get a second opinion.

Thanks

[Clayton Plank]

@Trentan Moore how have you structured your business partner into the deal? The bank requiring that amount down looks like they feel this is an investment property and not the regular owner occupied requirements.

[Trentan Moore]

@Clayton Plank thanks that could be the problem. I am pretty sure it was structured both as "co-borrowers". We originally wanted to both be on the loan so we use both incomes to increase our purchasing limit. Is there any way to structure it that way and be able to qualify for the 3.5% down? Maybe as a co-signer?

[Shawn Mcenteer]

with FHA one of the main perks is your ability to put little down, less then 5%. I think the reason your lender is requiring 25% down is because you are getting preapproved with a business partner which may skew the lending requirements. Lenders are not as lenient when approving partners. My understanding is these lending privileges are done to encourage first time home buyers to buy.

[Clayton Plank]

@Trentan Moore it is my understanding that a co-signer is only signing for your approved values. Not like a co-borrower which increases your values.

[Andrew Postell]

@Trentan Moore based off what you stated it sounds like you need to remove your business partner from the transaction.  Is that possible for you to do that?  If there are two or more borrowers but one or more will not occupy the property as his/her principal residence, the maximum mortgage is limited to 75% LTV - that is directly from the FHA handbook. The exception here is that if your business partner is related to you by blood (as long as they are not selling you the house as well)

[Trentan Moore]

@Andrew Postell Yes, that explains it, Thank you! Also just found this article

https://www.fha.com/fha_article?id=513 . I was hoping it could be done as co-borrowers so it could increase our limit, but I guess that would eliminate the 3.5% down. I will have to see what I qualify for as an individual borrower.

[Andrew Postell]

@Trentan Moore glad we found the cause.  I'll keep my fingers crossed for you that you can still get the deal going.  Good luck!

[Stephanie Medellin]

@Trentan Moore  You have a non-occupant co-borrower on a 2-4 unit building - that's why there is a 25% down requirement.  You will get the same answer from any lender you ask (unless the loan officer isn't aware of the guideline, in which case you won't find out until you get a denial by underwriting when they catch it!)

[Albert Bui]

Originally posted by @Trentan Moore:

Hi Guys,

My business partner and I are looking to take advantage of the low money down option of using an FHA loan to purchase a 2-4 unit property in the Pittsburg area. I would be the owner occupied resident that has to live there for 1 year. As we were going through the pre-approval process my lender informs me that FHA requirements are to put 25% down. This completely contradicted everything I have read/researched about FHA as a house hacking investment strategy.

I was wondering if anyone could clarify this and was also looking for a recommendation for an investor friendly lender in the Pittsburgh Area so we could get a second opinion.

Thanks

Stephanie is right about why you have been requested to bring in 25% down payment. Typically FHa is 3.5% down but because you brought in an non occupant coborrower you've triggered a clause within FHA that requires you to bring in 25% down which thereby defeats the whole purpose of using FHA. If you had to put 25% down you mind as well go conventional.

This basically tells me your lender has not done a very good job of walking you through the pros and cons of each option. He/she should say hey look here dont bring in the non occupant borrower because youre required min down will go from 3.5% down to 25% down and give you some alternative options.

[Albert Bui]

Originally posted by @Trentan Moore:

Hi Guys,

My business partner and I are looking to take advantage of the low money down option of using an FHA loan to purchase a 2-4 unit property in the Pittsburg area. I would be the owner occupied resident that has to live there for 1 year. As we were going through the pre-approval process my lender informs me that FHA requirements are to put 25% down. This completely contradicted everything I have read/researched about FHA as a house hacking investment strategy.

I was wondering if anyone could clarify this and was also looking for a recommendation for an investor friendly lender in the Pittsburgh Area so we could get a second opinion.

Thanks

You may want to run through the other requirements when using FHA for this house hacking strategy as well:

- does the property meet self sufficiency rules of gross rents X 75% - PITIA => 0 ? (only applies on 3-4 units)

- do you have 3 months cash reserves after down payment and closing costs (unless if you're getting a huge lender credit to pay all your costs) - only applies on 3-4 unit properties

- health and safety issues on the property? (applies to all FHA Collateral)

[Trentan Moore]

@Albert Bui so you're saying gross rents X 75%-PITIA has to be over 0 to qualify for FHA loan? This seems near impossible since its a low down payment and PMI is applied. Only applied to 3-4 units? Also does this include the rent for the unit you live in?

[Albert Bui]

Originally posted by @Trentan Moore:

@Albert Bui so you're saying gross rents X 75%-PITIA has to be over 0 to qualify for FHA loan? This seems near impossible since its a low down payment and PMI is applied. Only applied to 3-4 units? Also does this include the rent for the unit you live in?

This self sufficiency(SS) rule from FHA only applies to 3-4 unit properties and yes you use rents from all 4 units to satisfy this rule, but not to calculate income. Its important to understand the difference between these two facets.

The SS rule is not for income calculation its only to satisfy the rule itself. The real income calculation uses only rents from 3 out 4 units (assuming a fourplex, or 2 out of 3 assuming triplex).

So for rental income calculation we'd use 3 units current rents today X 75%  to add to your qualifying income.

[Trentan Moore]

@Albert Bui thanks. I found this helpful spreadsheet on BP regarding this rule. https://www.biggerpockets.com/files/user/logdog/fi...

Looks like it's an 85% self sufficiency rule in Pennsylvania? (which should make things easier to qualify)

[Albert Bui]

Originally posted by @Trentan Moore:

@Albert Bui thanks. I found this helpful spreadsheet on BP regarding this rule. https://www.biggerpockets.com/files/user/logdog/fi...

Looks like it's an 85% self sufficiency rule in Pennsylvania? (which should make things easier to qualify)

It changes all the time. The last FHA fourplex i funded was in Mar 2016 and at that time I thought it was still 100% of gross rents of all units had to be => than PITIA (prior rule before it changed), but the underwriter showed me an exerpt that required 75% of gross rents. Luckily this deal met the 1% or greater rule so this 25% discount on my rents was not an impediment to the qualification of that particular loan.

So could they use 85% or 75% depends on where the guideline is at today but to my knowledge its currently a 75% requirement. 

Sometimes guidelines change but underwriters still use old rules and the borrower in that instance gets away because of the ignorance of the underwriter (borrower win, originating bank losses).

[Joseph Scorese]

Hi @,

Welcome to BP!

3.5% Down Payment Minimum

Up to 6% Seller Assist toward closing costs

Lender Credit Allowance with Direct Lender

Gift Monies from family Members Allowed and must be trailed

Min. 620 Credit Score and W-2 with most lending institutions

PMI for 1-4 Units and it is permanent unless you refinance into a conventional loan with enough equity (PMI charge has recently dropped .50%)

FHA Lenders do not have to be Local it is a National Product.

Pittsburgh is an excellent market to House Hack 3 or 4 Unit Property for owner occupied.

Let me know if you have any questions.

Regards,

Joe Scorese

[Trentan Moore]

@Albert Bui Ok thanks for the help. Judging by what I am seeing in the Pittsburgh market, I don't think I should have a problem qualifying under that requirement.

@Joseph Scorese Hopefully I can find a lender in the Pittsburgh area that is helpful enough to walk me through all those requirements. You are saying I can find a lender outside of that area if needed? Will it still close as easily? 

[Joseph Scorese]

@Trentan Moore - FHA is a Govt National Program. It is boiler plate. The appraisers are regulated and the forms are regulated. You can go to anyone experienced in FHA.

Regards, Joe Scorese

[William C.]

Something isn't right. Iv seen this done before with 3.5%. I don't know all the specifics so I can't so where it went wrong, but feel free to reach out to me if you still need help. There are also other loan products available that require even less than FHA.

[Issac Lee]

Originally posted by @Albert Bui:

Originally posted by @Trentan Moore:

Hi Guys,

My business partner and I are looking to take advantage of the low money down option of using an FHA loan to purchase a 2-4 unit property in the Pittsburg area. I would be the owner occupied resident that has to live there for 1 year. As we were going through the pre-approval process my lender informs me that FHA requirements are to put 25% down. This completely contradicted everything I have read/researched about FHA as a house hacking investment strategy.

I was wondering if anyone could clarify this and was also looking for a recommendation for an investor friendly lender in the Pittsburgh Area so we could get a second opinion.

Thanks

Stephanie is right about why you have been requested to bring in 25% down payment. Typically FHa is 3.5% down but because you brought in an non occupant coborrower you've triggered a clause within FHA that requires you to bring in 25% down which thereby defeats the whole purpose of using FHA. If you had to put 25% down you mind as well go conventional.

This basically tells me your lender has not done a very good job of walking you through the pros and cons of each option. He/she should say hey look here dont bring in the non occupant borrower because youre required min down will go from 3.5% down to 25% down and give you some alternative options.

@ALBERT BUI

Hi @Albert Bui, can I do FHA 3.5% with my sister as a co-borrower who is a non-occupant on a 2-4 plex? I have seen a couple of posters as well as my lender say that I can't do this, but I cannot find it anywhere on HUD website that says I can't.

https://www.fha.com/fha_article?id=513

My lender said for my situation, I only qualify for a single family residential at 3.5% FHA and not a 2-4 unit dwelling. I looked at the HUD website and found their definition for single family as 1 to 4 units dwelling. I'm confused. Hoping for some clarity. Thank you.

@Chris Mason

[Issac Lee]

@Albert Bui

@Stephanie Medellin

Thanks!

[Albert Bui]

Originally posted by @Issac Lee:

@Albert Bui

@Stephanie Medellin

Thanks

Yes you can but as you may know from reading above is that if you bring in a non owner occupant borrower into a 2-4 unit fha 3.5% down transaction you in essence increase your required down from 3.5% up to 25% thereby defeating the main incentive to use fha in the first place (low down - main incentive).

[Stephanie Medellin]

@Issac Lee @Albert Bui is right.  Any time you have a non-occupant co-borrower on the loan for a 2-4 unit, immediate family or not, the rule changes to 25% down.  

fha.com is not an official website.

hud.gov is the correct site for up-to-date, accurate information.