First Investment - 3.5% FHA or 5% conventional?

[Kevin Huang]

I'm looking to make my first investment (3 or 4 plex) and have gotten varying advice as to which method to finance it.

Some have told me that a 5% conventional is the way to go on the first property as it will allow me to leverage the 3.5% FHA loan on the second investment that I make, whereas going for the FHA loan on the first investment makes it so I can't ever use the 5% conventional.

On the other hand, one lender has told me that even if I use the 5% conventional first, the 3.5% FHA is *effectively* no longer an option for me (I can't really recall the exact reasons he gave). He also stated that the MIP would be higher for the 5% loan when compared to the FHA.

Those of you with more experience in this area, can you help provide some clarity on the above points?  What would you recommend that I go with? 

[Jeff Dulla]

Hi Kevin,

FHA mortgages are not meant to finance investment or second homes, they are meant for primary residences.

If you are purchasing the house as a primary residence (to live in), for a multi-unit, an FHA loan would give you more flexibility with down payment. A conventional loan, because of the property type (3-4 unit), would usually require 25% down payment.

If you're intending to occupy the property for at least a year, and want more flexibility with down payment, it would probably make more sense to use FHA financing. Although you'll have higher mortgage insurance premiums, you could always choose to refinance later to a conventional loan once you have more equity in the property.