BRRRR with FHA Loan?

Question

Can you BRRRR with an FHA or FHA 203K loan?Curious if the cash-out refinance is possible.

Kevin Romines · Answer

Of course you can BRRRR with an FHA loan. However, once word of caution is that you must owner occupy the property for 1 year from closing date. Typically on most loans, you must occupy the property within 60 days of closing. On and FHA203K you must owner occupy the property at the point in which you can get the occupancy certificate, or when you can reasonably occupy the property while work is going on around you as determined by the lender?

You can also build in up to 6 monthly payments into your closing costs, if its determined that it will take you 6 months to occupy due to the rehab that will be going on? Then once you are done with the rehab, typically max of 6 months, then you can do a cash out refinance onto a Fannie Mae or Freddie mac loan as a rental property. So in the end, you may have only had to owner occupy the home for a month or two before you refinanced it into a rental property loan.

The only drawback to doing it in this way is that you will have to jump through a lot of hoops with regards to the loan docs, to get your loan closed, compared to a hard money or fix n flip type loan. However the down payment is cheaper and the rates while you hold the loan are much better than fix n flip or hard money. Plus you do have to intend to occupy the property. On a fix n flip loan or hard money loan, those are considered business purpose loans and therefore your not allowed to owner occupy the property. Different loans for different purposes.

A fix n flip or hard money loan will require between 10-20% down or maybe some combination of seller carry back and your own skin in the game up to 25% in the deal. The rates will be higher than FHA by double to triple the costs, but keep in mind, that the acquisition and rehab costs are typically limited to 6-9 months, so its not long term money and expenses.

Choose the path that matches what you truly plan to do with the house. If owner occupied, use the FHA203K or Fannie Mae Homestyle Renovation. If non-owner occupied, choose a fix n flip loan or a hard money loan.

I hope this helps?

Jake Tovey · Answer

I am currently hoping to pull this off as well. The way I understand the process is as follows:

1) Buy property with FHA and move into the property within 60 days

2) Complete the renovations, fill tenants in all other units (or bedrooms if SFH)

3) Wait 6-9 months (Seasoning period)

4) Refinance into a conventional loan, if you've built up 20% equity through the renovations and, hopefully, increase in income from the other tenants. Key is getting the property to appraise high enough that you have 20% equity after the increase in property value.

5) Once refinanced into a conventional loan, you are eligible for another FHA loan and can repeat process (Including physically moving into the next property). You could also cash-out refinance, keep the FHA loan, and use that money to buy your next property, but you would have to find another form of financing.

It is tough to pull off a cash out refi on top of it, since you are only putting 3.5% down, but it is possible. Once you refinance out of the FHA loan, you are definitely eligible for a second FHA loan. You just cant have more than one at a time (Few work arounds here but tough to do). As long as you are willing to physically move into each of the properties you purchase with an FHA loan, you can do it. Hope this helps and best of luck!

Kevin Romines · Answer

You seem to have some knowledge, but it also seems that you are making some assumptions. The FHA203K appraisal may not be any different in value than the appraisal that is done after the renovation, because the appraiser is taking into account the as completed condition, including finishes as compared to comps available at the time the 203K loan is done. Where you will get differences, is purely in that fact that the comps will be different comps by the time the rehab is completed. So depending on the swings in values in an area based on time of year, you will get differences in that way.

As far as refinancing after the rehab is done, yes, as soon as that last bit of work is done, you can immediately refinance. If the loan hasn't been in place for 6 months, the broker or correspondent is responsible for any EPO's to the lender. This means that if the loan pays off before the 6th payment is made, the broker or corespondent lender will pay all moneys made on the loan back the lender. However there is no penalty to the borrower.

As far as meaningful, you mentioned that its not worth it if you don't have the 20% equity. I would argue that it is meaningful. Even if you only had 15% equity, you can still get it refinanced and have a much smaller MI multiplier than if you had a higher LTV. Also, because its a conventional loan, you can petition the lender to remove the MI once you do have 20% equity. They may make you prove it by paying for an appraisal, but you don't have to refinance to get that done. So in that respect, getting off the FHA loan is much better for the borrower in the long run.

I agree, the borrower should talk to the lender and do everything they can to avoid the EPO or early pay off penalty. This penalizes the company that closes your loan. You don't want them to lose out on the deal, as they will never want to do another deal with you, and in the end, this is all about relationships!!!

Latasha Griffin · Answer

@Kevin Romines technically you can refinance into a conventional loan immediately after the renovation escrow account is closed. However, it's not meaningful unless you've forced equity into the property through the renovation. The mortgage insurance will remain on a fha loan for the life of the loan, so you want to refi once the LTV is below 80%. Base this off a new appraisal after the renow escrow is closed. The appraisal for the 203k will be very conservative since it's based off of speculation of the ARV. A new appraisal after you've renovated the property and stabilized the rent roll will be higher, most likely.

The problem with the refinance is, most likely your lender has sold the loan off to another bank after closing the reno escrow (or immediately after closing the loan if you were working with a correspondent lender which I dont recommend on a 203k). If you don't service the loan for at least 2 or 3 months (make payments) your lender will get hit with a hefty penalty from the servicing lender. Talk to you lender to understand what this time period is and negotiate up front to have them lower your refi fees if you let him/her also do the refinance. This is a great way to build a strong relationship with your lender if your looking to do so.

Andrew Postell · Answer

@Mike Dusenka yeah, the post above brings up some good points.  The BRRRR method is generally meant for investment properties....mainly because our out of pocket costs are so large on them.  Refinancing is also part of the strategy since we have to buy off market properties in many cases, which causes us to buy with Hard Money or some other loan type that can close quickly....but is a short term loan that we MUST refinance out of.

Since FHA loans are only for your primary home, have SUPER low downpayment requirements, and are 30 year fixed rate loans....it's likely that you won't need to refinance after you are in one.  I hope this makes sense how I am describing this.  Feel free to ask anything else that you may need. Thanks!

Kevin Romines · Answer

@Jake Tovey You mentioned that you would be renting out rooms. When renting out rooms in an owner occupied home its considered boarder income and can only be counted on FHA loans, not on Fannie Freddie who don't allow boarder income. If you are renting out rooms and the whole property is a rental, this may be difficult to be in a position to count unless you have 2 years or more doing this and it shows on your tax returns. Otherwise the house will have a market rent that it would rent for, and in order to count it, you may be required to do an appraisal on it even if its not the property that you are financing? Just to prove market rents?

I would have a deep conversation with your loan officer about this, and have them clear it through underwriting in advance, so you there will be no surprises.

I hope this helps?

Monique Heard · Answer

@Kevin Romines this was very helpful to me. Thanks!

BRRRR with FHA Loan?

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