Newbie Partners: Go in on first mortgage together or separate?

Question

Hey, everyone!So my investment partner and I are looking to snag our first deal, but first, we're looking into getting approved for a mortgage. Right now, we were looking at FHA loans because of their 3.5% down facet, and in our current situation, we're looking for low to no money down.The type of property we're looking into is a HomePath multi-family home with two units. We're going to live there together for the first year (and potentially rent out the other unit at the same time), and eventually rent out both units. However, we were wondering if we come across another good deal within that same year and wanted to utilize another FHA loan for example (if we didn't get have enough capital for a larger percentage of a down-payment), would we be able to do that if the initial property was our "primary residence" for that year? Would it be smarter to do each mortgage individually so we could potentially have two FHA loans and have each one as one of our primary residences? Is that worth it?Are there other pros or cons to going in on your first mortgage with your investment partner if you're looking to seriously get started this year? Do you have any advice you could offer or steps we should take in order to be smart and make the best financial decisions?I know this post was jumbled, so I'd be happy to clarify any questions you might have! I'm also open to any newbie advice you've got up your sleeves. Thanks :)

Adrienne Wonzer · Answer

FHA loans are not just for low-income and as long as your partner is not on the loan your strategy will work, if your partner is on the loan or title they would not qualify for an FHA loan. Further you can finance up to 4 units using FHA, but you are only allowed one open FHA loan and must be an owner-occupant. You can change your strategy down the road by refinancing to conventional if that is an option in a year. You would need the down payment but if your currently buying under market value you should come out even if not ahead.

Logan Allec · Answer

@Russ Draper @Nina Ricci FHA is not "for lower income only."  I made a decent income when I closed on a 4-unit using FHA financing, living in one (for 12 months) and renting out the other 3 (along with a bedroom in my unit for additional cash flow).  Once the 12 months were up, I moved to another house and now rent out all 4 units.  Everything I just described is perfectly acceptable and common under FHA rules.

Nina Ricci · Answer

@Russ Draper That makes sense, Russ; thank you!

Nina Ricci · Answer

@Adrienne Wonzer Oh perfect; this was really helpful. Thanks so much, Adrienne!

Russ Draper · Answer

I don't know how to get multiple FHA loans, I've never qualified for them so I can't comment much.  I would think after closing you could rent out the other unit without issue.  If your partner is investing money into this property I would expect them to want to be on the title of the property (and thus the mortgage)!

Nina Ricci · Answer

@Russ Draper Hey, Russ! Hmmmm, I see. Speaking to your points, we do have technically a lower income (each). Also, we were thinking if one of us were to be on the mortgage and use the property as a primary residence (living in one of two units). I know I read on Fannie Mae's HomePath for example that they require you to be a primary resident yourself for a period of time, and then you'd basically be free to do with it what you wished. I think during that period of time you'd still be able to rent out the unoccupied unit(s) to generate income. I wasn't sure, I guess, if FHA loans looked at the situation the same way--like we had to live there for a period of time (I think for them it is 12 months), then would be free to do whatever, and also could rent out a free unit whenever as long as we/I lived in the property too.But okay, so I guess I'll rephrase my question. Hmm. For example, if I got an FHA loan for our first property by myself and used it as my primary residence, I'd think my partner would be able to take our her own FHA loan (if it needed to work out like that) and get another property to use as her primary residence if/when the time came.So I guess I was wondering if, with little free capital to apply for mortgages that require higher downpayments, would it be smarter to go in on the mortgage by myself to free up that option for my partner? Or would it maybe be more strategic somehow to both be on that first FHA-loan mortgage together? I'm just worried about us not renting out the other unit for the first year and both being on the FHA mortgage and not having enough options or capital to invest in another deal until we could rent out one or both of those units.(Sorry for such a long response!! I'm new at this, haha.)

Russ Draper · Answer

I thought that FHA first time loan was for lower income only, and could only be used once.  And I thought it especially could not be used for investments:

"To prevent circumvention of the restrictions on making FHA-insured mortgages to investors, FHA generally will not insure more than one principal residence mortgage for any borrower. FHA will not insure a mortgage if it is determined that the transaction was designed to use FHA mortgage insurance as a vehicle for obtaining investment properties, even if the property to be insured will be the only one owned using FHA mortgage insurance."

Newbie Partners: Go in on first mortgage together or separate?

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