Should I buy a 4 PLEX FHA?

Question

I am about to buy a 4 PLEX and being the 4 PLEX is expensive should I do an FHA loan with 3.5% down and pay the PMI or pay the 20% and avoid the PMI?

Ed Groussman · Answer

Conventional rates are higher than FHA, plus there are additional pricing hits for multifam, fico, LTV. Youre effective rate going with an FHA with PMI will probably be close to what a conventional will end up being with 20% down. The downside is the 1.75% Upfront Mortgage Insurance, but it may be a small price to pay to keep you liquid.

Great advice from Hugo

Feel free to contact me directly if you need help or advice

Ed

Great advice from Hugo

Feel free to contact me directly if you need help or advice

Ed

Albert Bui · Answer

Some clarifications....

3-4plexes are 25% down min on primary or investment on regular conventional financing.

You can use freddie home possible (HP) conventional as a primary residence as low as 5% down with reduced MI cost as well.

You can use FHA to go in as low as 3.5% down but will have to live in the property with Freddie HP and FHA.

Yes FHA has 1.75 pts upfront financed AKA UFMIP (upfront mortgage insurance premium) + MMI factor of .85% annual.

What you should do depends on your deal, what you have for available capital, your investing criteria, and personal risk threshold.

Albert Bui · Answer

That's a lot of calculation there's no need to confuse things, your first example you had a 200k deal and 2000 gross monthly rents (500 per month x 4 units) so there you go 1% is greater than .90% general rule of thumb I mentioned so you're good when it comes to SS rule.

This does not mean it's a good deal as that's a personal decision however it does mean this deal above can meet fha financing potentially.

You grouped in your PITI as 1400 but as a lender I would need to verify your property tax rate and monthly insurance and fha monthly Mi to make sure it's in fact 1400.

Worst case you can switch to fha 5/1 ARM to force your PITI down or buy down your rate to get PITI to go down. Other options are to find cheaper insurance only during the purchase so our PITI calculation is lower, after close you can change insurance company's of your own choice.

Also 50k a unit at 1% is 500 per door, 650 is nice for investor returns but not necessary for SS rule.

Albert Bui · Answer

it's tricky because if tenants are unavailable at the time of the appraisal or if units are vacant the appraiser "can," use current market rents (their opinion of) which may be good or bad depending on where your current rents are at. This is of course is a loophole in making the self sufficiency rule work.

On a 650k purchase .9% would mean 5850 in gross rents per month or 1462.50 per unit per month in order to meet the rule.

On 3-4 unit properties, FHA also requires 3 months cash reserves as well in addition to down payment and closing costs.

Hope that helps.

Filipe Pereira · Answer

I was in a similar situation last October when I purchased my 4 unit here in Connecticut. I went the route of 20% for a couple reasons.

1- I couldn't stand the idea of spending $ on PMI - insurance I didn't "need".

2- I think buying properties with low or no money down typically puts you in a riskier situation. Let's say the market crashes...now you are underwater with the loan. If something were to happen in your personal life where you had to sell, you would have to sign a check to sell. 20% gives me a cushion I am more comfortable with.

Happy Investing!

Ana Garcia · Answer

I would do FHA and have the cash on your side for any "emergency" you may have, or for a future property you may want to buy. When comparing FHA and conventional, the latter seems to have higher interest rates, therefore making the mortgage payments very similar, conventional because of the higher rate and FHA because of the PMI.

Chris Toedter · Answer

@Albert Bui thanks, yeah the appraisal is using the current rents which are to low cause the owner hasn't raised the rent in 10 years.

At the point just thinking about going 20% down getting rid of the PMI and dropping my payment.

Or do you think I should go conventional 20% down and not get the 1.75 percent fha Fee ?

Albert Bui · Answer

Something to consider is when buying a fourplex with 203k FHA, the rehab loan variant of FHA is that you can use future market rents of the rehabbed units which can be significantly higher than current market rents. The amount of variance in rents, I've seen, have been hundreds of dollars especially if the buyer opts to purchase a distressed property.

As long as your ARV rents are .90% of the acquisition + rehab costs you can qualify for the self sufficiency rule.

@Jan Wanot  Can you attest to this given your recent 203k FHA fourplex ?

Sebastian E. · Answer

Thanks @Albert Bui!

Chris Toedter · Answer

@Albert Bui so the only issue I'm running into is the 75% or greater rule with the rent roll the owner hasn't raised rent in 10 years. I need a way around this or I'll have to put down 25 percent on a 650k loan.

Should I buy a 4 PLEX FHA?

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