FHA Loans and how to use them, are there any, "catches"?

Question

I'm currently in the military and will be PCSing (moving) within the next 2-3 months, I already have bought a house at my current duty assignment and wish to keep it as a rental property. I used a VA loan to finance it, I'm now looking into using a FHA loan due to lower money down and the ability make repair on a home. I am wondering if there are any decrepancies or things I should know before I try and get one. I know with a VA loan there were some "catches" to the loan itself. I want to save myself from having a headache later, as well as with a FHA loan what are the limits? Are repairs only limited to the home itself? what about a detached garage? A pool? All advice and answers are appreciated and welcome. Thank You

Brian Garlington · Answer

@David Smith

The "catch" with the FHA loan is you will pay PMI when you use it....roughly $90.00 per month for every $100,000.00 of the month. This may or may not kill your cashflow. Also....if you already own a property literally within 100 miles of where you are trying to get the FHA loan then the FHA will not let you get that loan.

Other then that it is VERY similar to the VA Loan.

If you're getting orders to another base....I would simply wait until you get there and (as long as it's 100 miles away from where your VA loan is) then use the FHA loan to buy a small multifamily.

Live there for a year in the FHA property.....THEN refi out of your FIRST VA loan........turn it into a conventional loan.......and then Get a VA Loan at the new duty station that you got the FHA loan at.....then when you get orders somewhere else....REPEAT.

I know of people that did this VERY succesfully when I was in the Navy and when they did their 20 years they ended up with 2 properties at each duty station every 3 or 4 years for a total of 20 plus duplexes that supplemented their military pension and literally were able to retire at 39 and 40 years old respectively.

David Smith · Answer

@Alexander Felice, @Adam L., @Daniel Lehman, @Albert Bui

Thank you all for your great advice I think I may try to refinance out to a Conv or I may just pay the difference. I have about 150-175 remaining on the VA loan available. @Daniel Lehman I am looking at Buying near Fayetteville NC but everything I've looked at has been about 125-175, just didn't have the knowledge base to know about these other options.

Albert Bui · Answer

HI David,

Id recommend you do a rate/term refinance (conventional) out of your current VA home loan to free it up. A conventional rate term refinance can go up to 95% of your current homes value so even if you value did not go up at all you may already be at 95% of your market value just purely from amortization/pay down.

If you're lucky values may have gone up a bit and your at 95% LTV or lower (your loan divided by current appraisal value).

This will free up your full VA entitlement so you dont have to deal with a partial entitlement problem.

If you do not refinance and leave your current VA loan in place it will be much more difficult to refinance it later on. The reason is after this primary residence because an investment property or has been converted to a rental property your LTV will go lower to 85% or less. This means you'll need an even higher appraisal value to refinance. This also means you will have to pay a higher rate and or cost/points due to it now being an investment property instead of just refinancing this property as a primary residence prior to leaving.

This is a mortgage planning tip if you plan to bob and weave in and out of the mortgage lending products ethically while utilizing them to maximum efficiency.

Daniel Lehman · Answer

@David Smith Generally speaking, VA is better than conventional, is better than FHA.  If you can go VA, go VA.  Refinance conventional and free it up and use it again.  Conventional allows for as little as 3% down for owner occupied, and FHA will only allow Owner Occ as well, so that may be a good option.  Basically, if your credit is good, go Conventional.  If it is Mid-600's, go FHA.  FHA has higher fees, an upfront Mortgage Insurance Premium of 1.75% of the balance (rolled into the loan) and .85% MI.   With good credit conventional is cheaper, generally speaking.  Someone just needs to help walk you through the plan.  Where are you buying?

Daniel Lehman

Matthew Rayl · Answer

@David Smith @Cory O'Dell

This is the best PDF I have found yet with not only loan limits by county, but also a breakdown of the small multi-fam limits respectively.  Dave, if your family dynamic allows it, go small MF.

https://www.fhfa.gov/DataTools/Downloads/Documents/Conforming-Loan-Limits/FullCountyLoanLimitList2018_HERA-BASED_FINAL_FLAT.PDF

Prost!

Alexander Felice · Answer

you can have a second VA loan, the total for both has a limit (~475K or so, not sure the exact amount)

if you've only lived in your house for a year, you may not be able to refi into conventional (need 80% LTV), you MAY be able to refi into FHA but, what's the point? just use your VA loan for the 2nd house as well.

I invest heavily in Fayetteville/Fort Bragg - you shouldn't go over your limit, if you're buying a ~250K+ house in Fayetteville you're making a terrible investment.

David Smith · Answer

@Brian Garlington, @Anthony Wick, @Cory O'Dell, thank you all for your suggestions and comments it is very appreciated. Maybe if it's best to give you the situation I'm in first. I bought a house with a VA loan and closed on 06 June 2017, so we've lived in the house for just over a year. We will probably be moving in November to Fort Bragg NC from Fort Lee VA (well over 100 miles). I thought since I had already used the VA loan I was out of luck to use it again, that's why when I discovered the FHA loan it would help fix my low money down issue. But I didn't even think to refinance my current home, would that be able to free up my VA loan? Thoughts and suggestions?

Cory O'Dell · Answer

You can use FHA. Like others said you'll have PMI though. You can also use a second VA loan, but there are dollar amount limits, just talk to your lender. For FHA, here are the stipulations for military out of HUD 4000.1:

"(7) Military Personnel Eligibility

(a) Standard

Borrowers who are military personnel, who cannot physically reside in a Property because they are on Active Duty, are still considered owner occupants and are eligible for maximum financing if a Family Member of the Borrower will occupy the subject Property as their Principal Residence, or the Borrower intends to occupy the subject Property upon discharge from military service.

(b) Required Documentation

The Mortgagee must obtain a copy of the Borrower’s military orders evidencing the Borrower’s Active Duty status and that the duty station is more than 100 miles from the subject Property.

The Mortgagee must obtain the Borrower’s intent to occupy the subject Property upon discharge from military service, if a Family Member will not occupy the subject Property as their Principal Residence."

I'd do another VA loan before using FHA personally. PMI sucks. But the option is available if you want/need it. Like VA, there are stipulations for condition of the house though, working windows, appliances, 2 years left on roof, etc. Talk to your lender!

FHA Loans and how to use them, are there any, "catches"?

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