FHA, MULTI-UNIT PROPERTY, AND A LOW CREDIT SCORE walk into a bar

[Shaneice J.]

Hello BP community, 

I am a long time "lurker" on this site so please allow me to introduce myself! My name is Asia and I'm interested in house hacking/cash flow through an FHA approved multi family property. I have put together a plan and would like the communities feedback/ tips/ suggestions on if there's any holes in it.

About me: I'm 23 and moved to Chicago a few years ago to attend university. I became interested in real estate when I realized how difficult it is to start your own business. Especially with no time (because you're always working) and no money (because it all goes to bills, groceries, and parking tickets). 

Goal: To obtain a 4 unit property with an FHA loan. I would reside in one unit and rent out the other three units. I want to be able to house hack the property (live virtually rent free, while tenants pay mortgage and other non repair related expenses) as well as create sizable cash flow (minimum 1k per month) which would be reinvested into buying more real estate. My ultimate goal is to buy enough property within the next 3-5 years so I'm able to quit my full time job and live comfortably off the cash flow (while also reinvesting it back into real estate). Thus allowing me to focus more of my time and energy into investing in my brand/ building my own businesses.

Obstacle: Currently I am on the hunt for an experienced FHA lender who accepts credit scores between 600-620 (due to having less than 2 years of established credit history and 2 accounts in collections, one is completely paid off but remains on report, the other is from school and is only $991) To build my credit I have 2 credit cards, I only utilize 10% monthly and pay in full & on time. Currently I only have a couple thousand saved, but I have drastically reduced my living expenses by moving in with relatives so I am no longer paying rent (which was 1k) I also anticipate a higher than average tax return this year which I'll also save. So as of right now my biggest issue is finding an established FHA lender who understands how the loan works and is effective in securing them.

Plan: When you have a credit score under 680 most lenders require at least 3 months of PITI (principle/interest/taxes/insurance) in reserve. By the end of March I anticipate my savings to reach 7k (a conservative estimate). In Illinois IDHA offers two assistance programs for first time buyers in the amounts of 5,000 and 7,500. The rules for each varies but in any case you can use the money for closing cost or the down payment (however you must contribute $1,000 or 1 percent of the purchase price, whichever is greater).

Steps to ownership:

• Find lender, get approved for a loan of 150k or less
• Find Agent who specializes or is familiar w/ FHA loans
• Purchase a foreclosed, tax lien, HUD owned, or short sell multi family property

1. *this option is the most cost effective, but also the most difficult because of FHA guidelines which is why I need an awesome real estate agent!

• Verify that property passes the Self Sufficiency test 

1. *this is a rule for multi family properties purchased using FHA. "The self sufficiency test states that the maximum mortgage is limited so that the ratio of the monthly mortgage payment, divided by the monthly net rental income, does not exceed 100 percent". (Thank you Mark Hafeli @ chicago reinvestment I learned this from your site/BP! I copied the definition as to avoid confusion..hope you don't mind)

• Utilize IDHA assistance program to put down 1% of purchase price

1. *by using this option it leaves all my remaining savings available for PITI reserve

• Ask the Seller to cover the closing cost OR have the closing cost included in FHA loan
• After closing on property get insurance (umbrella too!), take property out of my name place in LLC, open separate bank account for rent checks to be deposited (although, I may just have the rent checks go directly into my betterment account so they can earn more interest)

Of course after this step the process begins for renting the units (if they're already not leased ... a girl can hope right?) Then I'll slip on my property management hat (Still learning and assembling a plan for this role) But I really do look forward to it! I'll get to learn a lot and dare I say it sounds like it may actually be "fun"!

So BP community, with the details given am I missing something? Is minimum 1k cash flow per month too optimistic? Has anyone had success purchasing foreclosed, tax lien, short sale etc properties using FHA? If so, any advice? Has anyone used the Illinois first time home buyer assistance program? Also lawyers, any advice on those?

I would also like to add as a side note that I've done my due diligence in understanding several real estate investing rules/ definitions. For instance I know the 1% rule (although personally I want to adhere to 2-3%) The 50% rule, The 70% rule, what is Cap rate, what is NOI and ROI, what's cash flow & how it works etc. Some things I left out in fear of being too redundant or coming off as a "know it all" because I defiantly don't Lol! 

I didnt expect for it to be so much writing, but if you made it this far thanks for taking the time to read and hopefully offer insight. I look forward to everyone's responses and learning as much as I can in the process.