FHA + Owner Finance to avoid PMI?

[Nate Burnett]

Hi All,

I just was wondering what others though of this idea. My husband and I got approved for an FHA mortgage, it requires 3.5% down. Unfortunately with FHA they also require PMI until we owe less than 80% of the loan.

Now my thoughts are, what if we can talk the owner into financing 20% of the purchase? 

Could this get us around the PMI requirement and allow us to have an overall lower payment which would result in more cash flow immediately?

The price we're looking is about $250,000, so a 3.5% downpayment would give us about a $230/month PMI, is there a way to structure it with owner financing to make it a better deal? OR should we tough it out to accelerate the payments so we can get below the 80%? The property with us occupying one unit, at least the one we are looking at is $300/month cash flow positive after estimated maintenance/bills

I'd like to have more cash in hand so we can flip the units and increase rents (all the units in our area for sale are horribly dated).

Thanks!

[Zack Karp]

@Nate Burnett

Hi Nate. FHA requires MI, regardless of the LTV. Conventional financing you can avoid MI with 80% LTV 1st mtg but the subordinate financing (the seller financing) does not allow for 100% financing, you would need to put 5% down instead of 3.5%.

Your calculation on the MI is off though, on a 250K purchase price with 3.5% down, the monthly MIP would be about $170/mo.

There are creative ways to finance your purchase, especially for an investor doing a house hack and/or looking to refi soon. You should increase the rate and get a lender credit to cover all your costs, the upfront MIP, and all your prepaids. The breakeven point on that is years down the road (usually around 5-8 years). This will create more cash in hand for you if done right and will save you a ton of money.

Make sure you are working with an investor-friendly lender that understands what you are trying to do, and can advise you accordingly.  Let me know if you have any other questions!