How soon can you get an FHA construction loan after USDA loan?

Question

I live in a small town and there aren't really any multi family properties to buy. Plus, it's a lot cheaper to build by buying a new manufactured home and putting it on a permanent foundation. Now, the problem is, I don't want to pay a huge downpayment for building a 3-4plex. I've contacted a few banks, and they all want 20% down for construction. The other two options are USDA and FHA construction loans, but they all will only fund SINGLE family home construction. So, I was wondering if I can get a USDA construction-to-perm loan first, construct one home, then get an FHA construction-to-perm right away to construct another home while I live for one year in the USDA home (they will be on the same land which is properly zoned, but I haven't bought the land yet). Can I do this? What are some other creative strategies for financing multi-family construction with no-low downpayment?

Christi Hawkins · Answer

@Ellie Narie that sounds like a much better idea. I'm sorry if you've already said this but are you planning to live in one of the units? I would still search out some comps so you know what you're dealing with and discuss it with your lender. You don't want the lack of good comps to kill your deal at the end. Don't give up on this, it's a great idea! If your small town is anything like mine you will be providing a very necessary benefit to your community. Good Luck and I'd love it if you keep us posted on how it works out

Ellie Narie · Answer

Hmm. Well, the land that I have in mind allows for multi family buildings. Should I just go with FHA instead? I contacted an FHA construction lender and he said that I would be allowed to build multi family with an fha construction loan.

Christi Hawkins · Answer

@Ellie Narie USDA will not loan on an income earning property, regardless if they know about it upfront or after the fact. Yes, they would absolutely frown on you adding multiple kitchens and/or multiple entrances. As quickly as they issued that loan they can invoke the Acceleration Clause and you would be required to pay it off (refinance it) During the loan process you will sign several forms stating you understand the program and it's parameters. Please don't attempt to commit any kind of fraud with an FHA or USDA loan, it isn't worth it. There is also a fee for paying off the loan within a certain amount of time. It decreases after each year but the point of a USDA loan is to live in it as your primary residence. The other thing you need to consider is, will there be any comps after you're finished with the house. If you have to refinance you need to consider that because you will struggle to find a lender that will lend money on basically a non-conforming property with nothing similar surrounding it. I get your idea, I live in a small town too with very few multi-family properties and it's a great vision but you might have to start out with a partner who would give you the cash to do what you want to do.

Jonathan Holmes · Answer

Personally I would believe that if you signed on for a loan to use it one way all while planning on using it another you are in a shady area I wouldn’t go. You may need to broaden what sort of living situation you’re willing to accept or the time frame for your goals. Regardless of whether or not you get caught or the bank decides they care you’re going about things in what could be construed as a dishonest way. That is never good. Ask your lender directly which scenario is acceptable or not. Trying to skirt around these rules is going to get you bit eventually.

Ellie Narie · Answer

There's just nothing really for sale around my area, those run-down homes will cost just as much as it would cost me to build a brand new home. How can I go about the USDA loan diligently? What if, perhaps I don't make any changes in the first year and only make changes after of year of living there, would it still be bank fraud? Also, what makes a multi family home really a multi family home in the eyes of USDA? Is it the multiple kitchens, or perhaps multiple entrances? Would USDA really frown upon me adding more kitchens and entrances to the house, after the house is built and permanently financed?

Jonathan Holmes · Answer

You want to be real careful doing anything that could be considered fraudulent. What you’re basically asking is what’s the best way to trick a bank into financing a build. I have heard of people financing builds that included finished basements that had bedrooms bathrooms, a living area and a separate entrance which they then rented. Once it is constructed it is yours and you could then decide to rent a portion out. You should look into the Reno loans and consider buying a wrecked multifamily and rehabbing it. That loan allows you to remove everything but the foundation. I think it would be a more ethical option all around and less likely to get you accused of bank fraud.

Ellie Narie · Answer

I was also thinking, what if I use a USDA loan to build a bigger "single family looking home", and then once the home is built, take out a HELOC and use that money to convert the home into a multi family... would this work? Would I be able to take out a HELOC on USDA loan as long as the house appraises for more than it cost to build? And then would I be allowed to convert the USDA-financed house into multi family by adding kitchens/entrances/walls?

Jonathan Holmes · Answer

You are walking into a very questionable area. On the one hand if I buy an FHA property live in it for a year and a day and then move to another home with a different loan they will probably ask me why and want a reason. It sounds like you will be looking to get the second loan very soon after the first. I suspect you will have great difficulty coming up with a reasonable and honest answer to why you need to move from the home you just built into another home you’re going to build. That is a very questionable decision. An alternative might be to look into building a SFH with a separately metered two bedroom in law suite over the garage.