Question regarding recycling FHA loans

[Chris Dudine]

Hi everyone, question regarding FHA loans. I've heard on several podcasts recently about refinancing an FHA loan into a conventional mortgage, to free up your FHA loan for reuse. How many times can this be done? Can you keep doing that endlessly, as a strategy to keep getting low-downpayment loans for acquisition? What are the pros and cons of this strategy? It sounded solid, but they didn't go into the details.

[Andrew Garcia]

Hi @Chris Dudine, I know I am a little late to the party but I just came across your post.

To answer your first question, it can be done up to 10 times. You can own up to 10 properties with conventional financing. 

There are pros and cons to this strategy so I will give a brief overview below:

Pros:
1. Lower down payment requirements. 

2. Lower interest rates with primary pricing.

3. Ability to buy a new one every year.

Cons:
1. Upfront Mortgage Insurance Premium. You will have to pay an upfront fee to the Department of Housing and Urban Development for doing an FHA loan. It is 1.75% of the loan amount. You can finance this into the loan amount, but it will increase your principal balance and monthly payments.

2. More stringent appraisal and inspection process. FHA is more risk-averse when it comes to appraisals and inspections. They have higher standards than conventional. Many sellers will not do any repairs in today's market, so it is more likely for a deal to fall through with FHA.

3. Harder to get offers accepted. Sellers and listing agents are not supposed to discriminate against FHA buyers. However, it is the harsh reality of today's market. They are scared that the buyers do not have the ability to close and of that more rigorous appraisal and inspection process.

4. When refinancing, you will have to pay a second set of closing costs and you cannot refinance until it is at 75% LTV for conventional financing. That means that if you are doing this for the down payment, you will have to wait until the home appreciates or you pay down the balance.

5. Higher monthly mortgage insurance depending on your credit score, LTV, etc.

I would also recommend looking at 5% down conventional loans because the PMI drops off at 80% and you do not have to refinance into an investor loan. You can just buy it with primary pricing then keep it.

Obviously, this is a brief overview but if you have more questions or want a mortgage strategy session, feel free to ask.