5% Owner occupied?

Question

Hey BP,

Have any of you used this strategy?  I guess its not much of a "Strategy", but more of another way to get into a mortgage.  Im starting to look into my second rental property and would be moving out of my current duplex into my next property, and have heard that a 5% down owner occupied loan would fit well with my needs.  I guess my real question is, why go with this strategy over, lets say, an FHA at 3.5% again?  Lower payment?...barely id guess.  I definitely know the best source of info on this would be to (obviously) speak much more with the lender themselves, but im Just curious of your input.  Thanks

Zack Karp · Answer

Hey gang, there's a little bit of bad info on this post, so let me clarify.  Either some lenders giving bad info to some of you, or the game telephone where the info gets distorted as it's passed down.

FHA is only for a primary residence (except also streamline refinances are allowed for investment property).  You can put as little as 3.5% down no matter if it's 1-4 units.  You can only have 1 FHA loan at a time (except for extenuating circumstances like if you are relocating for work 100 miles away).

Conventional you can put as little as 3% down for a 1-unit primary residence purchase, 15% down for 2-unit, and 25% down for 3-4 units.  For an investment property, 15% down for a 1-unit, and 25% down for 2-4 units.

Conventional is better than FHA if you have a 680+ credit score, as the blended rate and PMI cost is lower.  But if your credit score is under 680, then usually the blended rate/PMI is actually lower with FHA.  Now, FHA has an upfront cost called UFMIP which is 1.75% of the loan amount.  But for many situations it's better to increase your rate and get a lender credit to pay that UFMIP, and again under a 680 credit score you will still meet or beat Conventional.  I help people do this all the time, it's a strategy that many loan officers don't take the time to educate the borrower about their options and the true cost-effectiveness.  It's especially critical for investors in order to get their best ROI.

And be careful of overlays.  Some lenders, banks and brokers have additional rules on top of the actual guidelines.  Things like number of properties, LTV's, debt-to-income, credit scores, asset reserves, and many other credit guidelines can vary.

While many people on BP are super smart and super helpful, they aren't professional lenders.  As an investor, It's best to talk to an investor-friendly lender/LO who knows their stuff.  Just be sure to do your homework.

Best of luck!

Account Closed · Answer

If the new property is far enough away from the first FHA property, so that commuting isn't reasonable to your job, you can keep the first FHA loan, and get a new one.

My daughter bought her first home with FHA financing in Salinas.  She later got a job in Walnut Creek, and FHA allowed her to keep the FHA financing on the Salinas house and turn it into a rental (and let her refinance it with the FHA streamline refi), then buy another FHA financed house in Oakland - because it would be too far for her to commute from Salinas to Oakland.

So, that's one example where you can have more than one FHA loan at the same time, with their permission to keep one as a rental.  Also, I'm forgetting her name, but there is a BP member who I think is in Hanford now, and they're military, and when they move, they get another FHA loan, for the same reasons above.

Ryan Canfield · Answer

@Jerry Padilla  Thanks for that information Jerry, sounds like my plan to rinse and repeat the same strategy has been axed as well.

Jerry Padilla · Answer

@Todd Fithian

To refinance out of your current FHA primary residence and into a primary residence conventional for a duplex, you would need to have an LTV of 85%.

For a future purchase you could go 5% down on a primary SFR with conventional.

As stated above FHA's MIP is higher than conventional PMI.

FHA does limit you to one FHA mortgage unless extenuating circumstances are met. They also limit you to a total of 7 units total, including investment properties as well as 4 mortgaged properties including subject. So it can be refinanced out of and repeated a couple times possibly..... But strict guidelines will need to be met. It is going to be difficult as well to go up in units, In a property and try to do FHA,

Austin Youmans · Answer

The main reason is that you can only have 1 FHA loan so unless you refinance the property you use it on you are not able to get another FHA loan.

The other reason would be higher PMI on FHA and more strict guidelines on the property itself.

Steve Bracero · Answer

Hi @Todd Fithian

I am looking to use a similar strategy I have the option to use a FHA loan or a 20% conventional loan... With the FHA I would be refinancing after I reach 20% equity in the property. With the FHA loan I will be paying PMI which can kill cash flow... When I run the numbers on a property I notice I have a much better ROI with less money down but more cash flow with the higher percentage down.. So I guess it depends on your personal goals and what you are comfortable with ROI, and cash flow per unit

Todd Fithian · Answer

Hey @Ryan Canfield! Thanks for the input!  I have actually been told differently about the 5% down while being a current owner, but dont quote me on that.  It might be different in California, but once again, Im just starting to look into this strategy.  To be honest, Im thinking that Im going to refi out of our current FHA loan and use the FHA house hack strategy for our second purchase.  If you dont mind me asking, whats preventing you guys from using the same strategy?  I mean, FHA after FHA?  Thanks again for your input!

Ryan Canfield · Answer

@Todd Fithian  Hi Todd,  I may be wrong but I'm under the impression that you cannot use the 5% down if you already have a property and it is for 1st time buyers or if you have purchased a property in the last 5 years.

My wife and I are currently doing the same strategy as you, we used 15% down conventional on our first house hack and then used an FHA for the 2nd.  I would have liked to only put 5% down but was told that since I have bought a house in the last 5 years that I was not eligible.  If you find a lender that will allow you to do this, please let me know as I would also be interested!

Todd Fithian · Answer

I appreciate the input!  Yea thats what Ive been hearing about the PMI.  I guess PMI wouldnt be a huge problem if the short term goal would be to refi out of the PMI.  As for an FHA, Im currently looking to Refi out of my FHA, but wasnt going to if i didnt need to.  Thanks for the input again!

5% Owner occupied?

Most Popular Reply