FHA & 203K vs conventional loan for multifamily house hack
Columbia, MO · Member since 2019 · 11 posts · 3 votes
Question: Is an FHA or 203K loan better than a conventional loan for purchasing your first multifamily property?
Hello!
I just got off the phone with a mortgage loan officer.
Backstory: My plan is to obtain pre-approval for a loan before speaking to a real-estate agent and looking for properties. Then, my plan is to close on a multi-family property (duplex, triplex, or fourplex) by June, and house hack it (I live in one unit and tenants live in the other units).
I was under the impression that an FHA or 203K loan would be better than a conventional loan because the government offered lower interest rates? I know that FHA and 203K loan requires PMI (private mortgage insurance), but I thought that you could skirt around the insurance by paying 20% down upfront - is this true?
Moreover, I thought that a 203K loan would be best, since it provides money for rehab.
What are your thoughts? Thank you in advance!
Hi Isaac,
A 203k loan is a type of FHA loan. The great benefit of it is the low down payment of 3.5% but it does have the mortgage insurance premium that you have to add to your loan. Also, insurance rates tend to be higher for FHA loans than conventional loans.
You are also stuck with the private mortgage insurance forever on an FHA loan. The 20% down works on conventional loans only.
There are conventional rehab loans as well. We just got one. We pay 5% down and can get the pmi taken off after paying 20% down. The interest rate is higher than an FHA loan. It is also higher than a regular conventional loan. Since it is a REHAB loan you will pay the price. Good thing is that you can refinance out of it after 6 payments (check with your lender) into a loan with lower interest.
When we compared the 203k with a conventional rehab loan for the same amount of loan. We were able to have more money for the rehab with the conventional one and still stay at the same monthly payments. I would suggest working with a lender who does both and asking him/her to run both scenarios so you can see the breakdown of everything.
Question: Is an FHA or 203K loan better than a conventional loan for purchasing your first multifamily property?
Hello!
I just got off the phone with a mortgage loan officer.
Backstory: My plan is to obtain pre-approval for a loan before speaking to a real-estate agent and looking for properties. Then, my plan is to close on a multi-family property (duplex, triplex, or fourplex) by June, and house hack it (I live in one unit and tenants live in the other units).
I was under the impression that an FHA or 203K loan would be better than a conventional loan because the government offered lower interest rates? I know that FHA and 203K loan requires PMI (private mortgage insurance), but I thought that you could skirt around the insurance by paying 20% down upfront - is this true?
Moreover, I thought that a 203K loan would be best, since it provides money for rehab.
What are your thoughts? Thank you in advance!
If you're looking for a place that needs to be fixed up and you want to live in it 203K is a better optional than a regular conventional loan.
You can also live in the unit while construction is going on as long as it doesn't endanger your or your tenants.
Hi Isaac,
A 203k loan is a type of FHA loan. The great benefit of it is the low down payment of 3.5% but it does have the mortgage insurance premium that you have to add to your loan. Also, insurance rates tend to be higher for FHA loans than conventional loans.
You are also stuck with the private mortgage insurance forever on an FHA loan. The 20% down works on conventional loans only.
There are conventional rehab loans as well. We just got one. We pay 5% down and can get the pmi taken off after paying 20% down. The interest rate is higher than an FHA loan. It is also higher than a regular conventional loan. Since it is a REHAB loan you will pay the price. Good thing is that you can refinance out of it after 6 payments (check with your lender) into a loan with lower interest.
When we compared the 203k with a conventional rehab loan for the same amount of loan. We were able to have more money for the rehab with the conventional one and still stay at the same monthly payments. I would suggest working with a lender who does both and asking him/her to run both scenarios so you can see the breakdown of everything.
There is a lot of good information in these replies. I was just talking with a lender who had told me what @Ana Coello said. I was under the same impression when I was first learning about investing in real estate, but after some more research I found that it might be best to get a conventional loan to not have to deal with the higher interest rates and the PMI. Of course, every situation is different, so make sure you are taking each investment opportunity into consideration when choosing how to finance it!
Thank you all for your responses! Do local banks sometimes offer 203k and conventional rehab loans?
Hi Isaac,
A 203k loan is a type of FHA loan. The great benefit of it is the low down payment of 3.5% but it does have the mortgage insurance premium that you have to add to your loan. Also, insurance rates tend to be higher for FHA loans than conventional loans.
You are also stuck with the private mortgage insurance forever on an FHA loan. The 20% down works on conventional loans only.
There are conventional rehab loans as well. We just got one. We pay 5% down and can get the pmi taken off after paying 20% down. The interest rate is higher than an FHA loan. It is also higher than a regular conventional loan. Since it is a REHAB loan you will pay the price. Good thing is that you can refinance out of it after 6 payments (check with your lender) into a loan with lower interest.
When we compared the 203k with a conventional rehab loan for the same amount of loan. We were able to have more money for the rehab with the conventional one and still stay at the same monthly payments. I would suggest working with a lender who does both and asking him/her to run both scenarios so you can see the breakdown of everything.
This isn't 100% accurate. FHA and VA rates are always going to be lower than Conventional rates. When you add PMI then they tend to be higher. Also, FHA will allow PMI to be dropped after 11 years if you do the following. Put down more than 10% or have a loan that has a 15-year term or less.
It's imperative that you use a loan officer or broker that has experience in investment type loans and knows all the guidelines to give you the best and most accurate information.
FHA loans are expensive but in a lot of cases they out preform conventional loans because they're easier to qualify for, require less down payment. Now with 203K you must live in the unit as opposed to Fannie Mae Home-style where you can use this for investment purposes.
I hope this helps and have a good one.
@Ana Coello
I've never seen conventional/rehab loans offered?
@Mike Freske look into the FannieMae HomeStyle loan
Thanks for the great responses! The loans (Homestyle, conventional, 203K) all seem to be viable options (203K sounds overall better since I plan on rehabbing and living in the unit). The mortgage officer that I was speaking to was trying to steer me away from 203K loans, but probably because he didn't offer them.
I'll find a mortgage broker or lender who can do these different types of loans, and compare and contrast.
Thank you all for the feedback!
@Isaac Galli there are a TON of hoops to jump through for the 203k loan to do it successfully. I found it so much easier to get a house that could use a little value add. Go to Home Depot and get a loan for materials and then start plugging away on the value add.
I haven’t successfully navigated the 203k waters so I might not be the best one to answer this.
For Investors the HomeStyle loan will allow a single family home to be purchased with as little as 15% down and have some nominal private mortgage insurance based on borrowers credit score. For multi unit properties there is also a renovation loan up to 4 units ( fourplex) as well for Investors who will never live there or fix & flip. For 2 to 4 units the down payment rises to 25% off the sum of purchase price + rehab dollars. Rates are all based on30 year terms so less pressure than any Hard Money type loan and rates are around 6% for 30 years which offer security and all the debt is on the investment property rather than HELOC on your primary residence. If you wish to owner occupy for at least 12months then HomeStyle also is a good option but must have 25% down for 2 to 4 units properties.
If you intend to live there at least 12 months then I would agree that a FHA 203K is an attractive option in that even at 3.50% down you can still get all the rehab money needed and then later refinance out of that loan to one with no mortgage insurance.
Each of these loans will require the use of a locally licensed General Contractor or licensed sub-contractors to perform the work. These loans are not like Hard Money where you get a bucket of cash to spend as you wish with no experienced supervision. But they offer the security of a fixed rate for up to 30 years and assistance/oversight of lenders construction consultant to see all work performed with Permits and acceptable to local building codes. I write more about each on my blog or send me quesitosn any time.
@Perry Farella and @Jimmy Deringer, out of curiosity, do you know what the renovation only loan is called? I'm interested to learn more
HI,
The rehab loan for Investors of 2 to 4 unit properties is a product called EZ Conventional. It follows conventional loan limits basically. Below at are the highlights:
Hi Isaac,
A 203k loan is a type of FHA loan. The great benefit of it is the low down payment of 3.5% but it does have the mortgage insurance premium that you have to add to your loan. Also, insurance rates tend to be higher for FHA loans than conventional loans.
You are also stuck with the private mortgage insurance forever on an FHA loan. The 20% down works on conventional loans only.
There are conventional rehab loans as well. We just got one. We pay 5% down and can get the pmi taken off after paying 20% down. The interest rate is higher than an FHA loan. It is also higher than a regular conventional loan. Since it is a REHAB loan you will pay the price. Good thing is that you can refinance out of it after 6 payments (check with your lender) into a loan with lower interest.
When we compared the 203k with a conventional rehab loan for the same amount of loan. We were able to have more money for the rehab with the conventional one and still stay at the same monthly payments. I would suggest working with a lender who does both and asking him/her to run both scenarios so you can see the breakdown of everything.
This isn't 100% accurate. FHA and VA rates are always going to be lower than Conventional rates. When you add PMI then they tend to be higher. Also, FHA will allow PMI to be dropped after 11 years if you do the following. Put down more than 10% or have a loan that has a 15-year term or less.
It's imperative that you use a loan officer or broker that has experience in investment type loans and knows all the guidelines to give you the best and most accurate information.
FHA loans are expensive but in a lot of cases they out preform conventional loans because they're easier to qualify for, require less down payment. Now with 203K you must live in the unit as opposed to Fannie Mae Home-style where you can use this for investment purposes.
I hope this helps and have a good one.
I have to be honest with you Shawn, FHA rates are actually higher in most cases then that of conventional loans.
Overall both the FHA 203K and the Fannie Mae HomeStyle are great programs. IMO one is not necessarily better than the other. Its really more about what is the best fit for the individual (credit score, DTI, down payment, etc.). One key thing that no one thinks about with FHA loans (all FHA loans, not just 203Ks) is the self-sufficiency rule, which applies to 3 and 4 family homes. In order to pass the self-sufficiency test, you'll need to prove that 75% of the rental income you're likely to receive (including the unit you would occupy) will exceed the full monthly mortgage payment. That means calculating both the monthly rental income and the monthly mortgage payments.
In order to figure out the numbers, you’ll first need to get an appraiser to value the rental potential of the property at market rates. In other words, the appraiser will tell you how much rent you can expect to charge at the going rate (not at historical or actual rates).
Even more critical than the appraisal, however, is the loan calculation. In fact, correctly calculating the cost of the loan is the single most important step in the qualification process, determining how much the FHA will be willing to cover and, therefore, how much you will be able to finance.
Included in that monthly mortgage calculation are the following costs:
At the end of the day, your loan officer should be able to crunch these numbers properly to ensure you do not find yourself in a bad situation. You will be amazed at how many FHA experts do not know about this rule and it comes to light AFTER the contract has been written, monies paid for inspections and appraisal completed.
Hi Isaac,
A 203k loan is a type of FHA loan. The great benefit of it is the low down payment of 3.5% but it does have the mortgage insurance premium that you have to add to your loan. Also, insurance rates tend to be higher for FHA loans than conventional loans.
You are also stuck with the private mortgage insurance forever on an FHA loan. The 20% down works on conventional loans only.
There are conventional rehab loans as well. We just got one. We pay 5% down and can get the pmi taken off after paying 20% down. The interest rate is higher than an FHA loan. It is also higher than a regular conventional loan. Since it is a REHAB loan you will pay the price. Good thing is that you can refinance out of it after 6 payments (check with your lender) into a loan with lower interest.
When we compared the 203k with a conventional rehab loan for the same amount of loan. We were able to have more money for the rehab with the conventional one and still stay at the same monthly payments. I would suggest working with a lender who does both and asking him/her to run both scenarios so you can see the breakdown of everything.
This isn't 100% accurate. FHA and VA rates are always going to be lower than Conventional rates. When you add PMI then they tend to be higher. Also, FHA will allow PMI to be dropped after 11 years if you do the following. Put down more than 10% or have a loan that has a 15-year term or less.
It's imperative that you use a loan officer or broker that has experience in investment type loans and knows all the guidelines to give you the best and most accurate information.
FHA loans are expensive but in a lot of cases they out preform conventional loans because they're easier to qualify for, require less down payment. Now with 203K you must live in the unit as opposed to Fannie Mae Home-style where you can use this for investment purposes.
I hope this helps and have a good one.
I have to be honest with you Shawn, FHA rates are actually higher in most cases then that of conventional loans.
When you look at the par rate for an FHA loan and Par rates for Conventional loans the lenders, we do business with have FHA rates lower. You're a lender so check out one of your favorite lenders and compare yourself. If you find a lender that has a higher par rate for FHA than their conventional rates send me over that rate sheet. I really would like to see it.
Now when you add UFMIP and Monthly MIP then it's a different story. But if you had a buyer that wanted to pay the Up-Front Mortgage Insurance Premium and put down 10% or more after 11 years based on Friday’s rates, they could have a rate of 3.375% on a 30-year fixed loan. Most people won't pay that 1.75% up front so this rarely happens.
Hi Isaac,
A 203k loan is a type of FHA loan. The great benefit of it is the low down payment of 3.5% but it does have the mortgage insurance premium that you have to add to your loan. Also, insurance rates tend to be higher for FHA loans than conventional loans.
You are also stuck with the private mortgage insurance forever on an FHA loan. The 20% down works on conventional loans only.
There are conventional rehab loans as well. We just got one. We pay 5% down and can get the pmi taken off after paying 20% down. The interest rate is higher than an FHA loan. It is also higher than a regular conventional loan. Since it is a REHAB loan you will pay the price. Good thing is that you can refinance out of it after 6 payments (check with your lender) into a loan with lower interest.
When we compared the 203k with a conventional rehab loan for the same amount of loan. We were able to have more money for the rehab with the conventional one and still stay at the same monthly payments. I would suggest working with a lender who does both and asking him/her to run both scenarios so you can see the breakdown of everything.
This isn't 100% accurate. FHA and VA rates are always going to be lower than Conventional rates. When you add PMI then they tend to be higher. Also, FHA will allow PMI to be dropped after 11 years if you do the following. Put down more than 10% or have a loan that has a 15-year term or less.
It's imperative that you use a loan officer or broker that has experience in investment type loans and knows all the guidelines to give you the best and most accurate information.
FHA loans are expensive but in a lot of cases they out preform conventional loans because they're easier to qualify for, require less down payment. Now with 203K you must live in the unit as opposed to Fannie Mae Home-style where you can use this for investment purposes.
I hope this helps and have a good one.
I have to be honest with you Shawn, FHA rates are actually higher in most cases then that of conventional loans.
When you look at the par rate for an FHA loan and Par rates for Conventional loans the lenders, we do business with have FHA rates lower. You're a lender so check out one of your favorite lenders and compare yourself. If you find a lender that has a higher par rate for FHA than their conventional rates send me over that rate sheet. I really would like to see it.
Now when you add UFMIP and Monthly MIP then it's a different story. But if you had a buyer that wanted to pay the Up-Front Mortgage Insurance Premium and put down 10% or more after 11 years based on Friday’s rates, they could have a rate of 3.375% on a 30-year fixed loan. Most people won't pay that 1.75% up front so this rarely happens.
I lend direct so I lend off my companies own rate sheets, and conventional rates are better for me. Par rate for a 30 year fixed conventional is around 4.25%-4.375%.
Hi Isaac,
A 203k loan is a type of FHA loan. The great benefit of it is the low down payment of 3.5% but it does have the mortgage insurance premium that you have to add to your loan. Also, insurance rates tend to be higher for FHA loans than conventional loans.
You are also stuck with the private mortgage insurance forever on an FHA loan. The 20% down works on conventional loans only.
There are conventional rehab loans as well. We just got one. We pay 5% down and can get the pmi taken off after paying 20% down. The interest rate is higher than an FHA loan. It is also higher than a regular conventional loan. Since it is a REHAB loan you will pay the price. Good thing is that you can refinance out of it after 6 payments (check with your lender) into a loan with lower interest.
When we compared the 203k with a conventional rehab loan for the same amount of loan. We were able to have more money for the rehab with the conventional one and still stay at the same monthly payments. I would suggest working with a lender who does both and asking him/her to run both scenarios so you can see the breakdown of everything.
This isn't 100% accurate. FHA and VA rates are always going to be lower than Conventional rates. When you add PMI then they tend to be higher. Also, FHA will allow PMI to be dropped after 11 years if you do the following. Put down more than 10% or have a loan that has a 15-year term or less.
It's imperative that you use a loan officer or broker that has experience in investment type loans and knows all the guidelines to give you the best and most accurate information.
FHA loans are expensive but in a lot of cases they out preform conventional loans because they're easier to qualify for, require less down payment. Now with 203K you must live in the unit as opposed to Fannie Mae Home-style where you can use this for investment purposes.
I hope this helps and have a good one.
I have to be honest with you Shawn, FHA rates are actually higher in most cases then that of conventional loans.
When you look at the par rate for an FHA loan and Par rates for Conventional loans the lenders, we do business with have FHA rates lower. You're a lender so check out one of your favorite lenders and compare yourself. If you find a lender that has a higher par rate for FHA than their conventional rates send me over that rate sheet. I really would like to see it.
Now when you add UFMIP and Monthly MIP then it's a different story. But if you had a buyer that wanted to pay the Up-Front Mortgage Insurance Premium and put down 10% or more after 11 years based on Friday’s rates, they could have a rate of 3.375% on a 30-year fixed loan. Most people won't pay that 1.75% up front so this rarely happens.
I lend direct so I lend off my companies own rate sheets, and conventional rates are better for me. Par rate for a 30 year fixed conventional is around 4.25%-4.375%.
Oh, ok that makes sense. We broker so it's a different business model as you know. Take care Sir and have a good one.
@Mike Freske look into the FannieMae HomeStyle loan
Thank you!