Refinancing an FHA 203k Loan

[Alejandra Tapia]

If I use an FHA 203k loan to purchase a home, I'm aware that I would have to occupy the home for a year prior to renting it out (generally speaking). However, I've read that a 203k loan can be refinanced after 6 months (into a conventional loan), at which point the appraised value of the home would be used in the refinance. My question is: Once the 203k loan is refinanced into a conventional loan, would that pretty much eliminate the 1yr-minimum requirement for an owner occupant?

Also, please correct me if I’m wrong on any other information I shared above.

-Alex

[Paul Welden]

Here's my two cents ....
When a borrower applies for and closes on an FHA loan, including the 203k, the intent is that the borrower intends to occupy the property as their primary residence.

Now, situations change and so people's lives, but if a borrower gets an FHA loan with the intent to not reside in the property as their primary residence within the 1st yr and/or refi within the 1st year and not reside in the property as their primary residence, then it's possible that the FHA loan was not used for its intended purpose.

That being said, people's lives and situations change all the time. But, if this FHA loan file was audited (very rare, but possible), you may have some explaining to do.

[Alejandra Tapia]

@Paul Welden I hear you. That makes total sense. I appreciate your input!

[Andrew Postell]

@Alejandra Tapia just to reinforce what was said above, and to answer your question, if you have 5% equity in a single family home you can refinance into a conventional loan. This might be beneficial even if you live in the property if it reduces your PMI...or if you have more equity than 5%. If it's a duplex, then you would need 15% equity to refinance.

Now, when you refinance the lender will ask "do you intend to occupy the property as your primary home"...and that will start the 12 month intent again.  If you are NOT occupying the property then you would need to refinance the property as an investment property, which would require 15% equity as a single family home.  I hope this all makes sense.  Thanks!

[Alejandra Tapia]

Originally posted by @Andrew Postell:

@Alejandra Tapia just to reinforce what was said above, and to answer your question, if you have 5% equity in a single family home you can refinance into a conventional loan. This might be beneficial even if you live in the property if it reduces your PMI...or if you have more equity than 5%. If it's a duplex, then you would need 15% equity to refinance.

Now, when you refinance the lender will ask "do you intend to occupy the property as your primary home"...and that will start the 12 month intent again.  If you are NOT occupying the property then you would need to refinance the property as an investment property, which would require 15% equity as a single family home.  I hope this all makes sense.  Thanks!

Thanks, Andrew! So 5% equity needed for a SFR and 15% equity needed for a duplex, in order to refinance into a conventional loan, IF I intend to use to property (whether a SFR or a duplex) as a primary home, correct?

When you say, "the lender will ask 'do you intend to occupy the property as your primary home'...and that will start the 12 month intent again", you're referring to refinancing it into an FHA loan again (from a 203k loan)?

So if I do not intend to use the property as primary residence, I would need to have 15% equity in order to refinance, regardless of whether it is a SFR or a duplex?

[Andrew Postell]

@Alejandra Tapia Fannie Mae and Freddie Mac loans can be used for both primary homes and investment properties. So I was referring to the element of refinancing FROM and FHA loan INTO a conventional loan. The conventional, primary home loans require 5% and 15% down respectively. Even with a conventional loan they will ask if you are intending to occupy the property as your primary home for 12 months. Hope that helps.

[Alejandra Tapia]

@Andrew Postell Got it. Yes, thank you for clarifying!

[Dave Spooner]

@Alejandra Tapia Just wanted to add to this - you would not necessarily need 15% to refinance a duplex, as long as you're living there. You should be able to find a lender that will refinance at 5% equity. You would, however, need to qualify for their typically more stringent borrowing guidelines. You would also be required to pay PMI on the loan, but you're essentially already paying that in the FHA MIP.

Your best case scenario is that your renovations significantly improve the value of the property. If that's the case, you may be able to get to the banks desired 20% LTV. This will remove the PMI and reduce your overall cost!

I also want to reiterate Paul's cautions regarding moving out before the year mark. Best of luck!

[Wayne Brooks]

@Dave Spooner You can Not get 95% LTV on a conventional loan duplex.

[Dave Spooner]

@Wayne Brooks -  With Fannie Mae, my understanding is that you are correct. That's a hard and fast rule.

[Andrew Postell]

@Alejandra Tapia just wanted to bring some clarification to the above mentions.  Fannie Mae does have a 5% down PURCHASE loan on duplexes.  But it's designed for lower income people...and frankly, pretty difficult to qualify at this point...but it does exist.  But for your scenario, 15% equity is what will be required for Fannie/Freddie when you refinance and I have not seen any other loan type that allows less than 15%.  Just stick with that number if it's applicable.

[Dave Spooner]

@Andrew Postell I'm surprised to hear you say that regarding a conventional loan. It is certainly true that nearly all lenders recommend 85-75% LTV on a loan, and many require it, but there are lenders that will allow you to refinance at 5% down on an owner-occupied property if you're not taking any cash out, even if it has more than one unit. I just did one myself recently.

Perhaps I'm missing something in the discussion here. Definitely don't want to lead anyone astray!

[Andrew Postell]

@Dave Spooner sorry, I just realized what I did. Yes, you can use the Freddie Mac Home Possible to refinance at 95% LTV on a 2-4 unit property. I still feel it's pretty hard to hit their income requirements now but sorry for the confusion.

[Alejandra Tapia]

@Dave Spooner

@Andrew Postell

Thank you both for your responses and time! They have helped!