Purchasing the second home (Getting the ball rolling)

[Jef A.]

I recently paid off my home and i am interested in purchasing another home/duplex for the rental income. Banks are telling me that because i own a home i would have to pay 20-25% for the down payment because it would be considered a second home. Would it be possible for me to transfer the home to an LLC or a land trust that i own and then when i go to the bank i would technically no longer own a home and wouldn't have to do the 25%down payment? Is this legal/ethical?

I am not trying to break any rules i am just trying to think creatively to overcome obstacles. 

[Albert Bui]

Originally posted by @Patti Rosepiler:

That is what I had planned (FHA or Conv) just wasn't sure how they will look at the one I'm in now. I will barely break even renting it when I move, but would like to hold it long term because of unbelievable location on the water and growth here. I have never owned 2 homes before. Sorry for dumb questions. I will def be reading day and night to be prepared for goals.

 Since you already have a property you wont be able to use the conventional home possible program which allows down payment as low as 5% for 2-4 unit primary residences.

You'll most likely have to use FHA 3.5% down payment financing which means you'll have specific rules you'll have to follow:

- you'll need a fourplex where the gross rents assuming all 4 units added up to equal about .90% of the sales price, meaning a 400,000 sales price fourplex generates about $3,600 per month in gross rents (4 units X 900 per unit) in order for the fourplex to meet FHA's self sufficiency rules (general rule of thumb)

- you'll need 3 months reserves for the entire monthly payment (in addition to 3.5% down payment + closing costs)

- you may want to "move out," of your current primary and rent first rather than moving from your current primary to buy this new fourplex since the "scenario," may not be too plausible to a loan underwriter if your going from a single family home to move into a fourplex. The other issue you can avoid by renting first is you dont have to adhere to the rules regarding "vacating a primary residence." Mid 2016 FHA instituted rules around vacating a primary residence which made it harder to use FHA financing when a borrower was vacating a primary ( Leaving a current home that was a primary) to purchase using a new FHA loan. This rule made it difficult because the borrower is not allowed to use rental income to offset his/her current mortgage (the property you're leaving) to qualify for a new home with FHA financing by placing a min 100 mile restriction on the new FHA financed property. Keep note that this only applies when you're trying to use rental income to offset your current loan, if you're not, and you can qualify for both homes with your other income then this 100 mile requirement is a moot point. The benefit of moving out first is that you're no longer considered under the "vacating a primary," definition because you're now "renting," and can use rental income offset and purchase a new property with FHA with out 100 mile restrictions.

This new guideline reduces chances for borrowers to use FHA to acquire more quasi primary/investment properties since the original intent for FHA was home ownership not investment property promotion.