Chicago, IL · Member since 2017 · 40 posts · 17 votes
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?
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.
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.
@Kevin Huang are you planning on living in this property? There are some pretty big changes once you start planning on purchasing a mulitfamily unit property. For example, if you are buying a 3-4 unit property, and you are planning on living in it, then a conventional loan will require 20% as your down payment. If you are NOT planning on living in it, then your down payment needs to be 25% of the purchase price. These are conventional rules (Fannie Mae/Freddie Mac) and they are different than a single family home (SFH). SFH only need 5% down if you are living in it and 15% down for an investment property.
With an FHA loan you MUST live in the property to qualify for the loan. The downpayment is 3.5% even with a 3-4 unit property but you also have some specific rules on your NEXT FHA loan. Meaning, you can only get a 2nd FHA loan if you live in the next property AND you are moving outside of the commuting area of your original FHA property.
One of your questions was on buying a conventional property first and then a FHA loan. This is allowed as long as you live in the FHA loaned property.
I hope this information helps and if you have other questions feel free to ask. Thanks!
Kevin,
I would do the FHA loan first and live in that property for a year. From there you have options on what to do. You could look for a 5% conventional mortgage for the home you plan to move into (or another investment type property that you could live in), or save for a rental which would require 20% or more down.
One thing to look into is if you are able to get a 5% down loan for your primary residence. You may want to talk with a bank to make sure they will do that.
Good luck!
Thanks for the responses everyone. To clarify, I have two options available to me:
-5% down conventional loan
-3.5% down FHA loan
My question essentially is if I use one of these loans, does that knock out my ability to use the other loan on a future purchase? Do the benefits that either loan offers make it worth forgoing the ability use the other loan?
Also - I will be living in one unit and renting out the rest, which I should have clarified earlier.
FHA has lower down payment requirement so that would be good way to start the investment as primary residence. The conventional loan has higher down payment requirement which can start from 15% to 25%.
If you do conventional first and then try FHA, you're (probably) going to run up against a bunch of crap you can't control (like if you happened to coincidentally get a job transfer 100+ miles away) that will (likely) prevent you from using departing residence rental income, trashing your calculated DTI.
Fannie Mae is much more investor friendly than FHA.