Beginner Real Estate agent/investor in SoCal interesting in BRRR'ing single fam/multi fam, but potentially house-hacking my first investment.
Have a question about the Refinance process. Would it be possible (or prudent) to buy a property with a hard money lender, and then refinance with an FHA loan? FHA loan sounds enticing due to low interest rates/down payment, but am also hoping for cash out refi in order to have equity for another deal. Let me know what you all think! Thanks!
Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
6y
Hi @Timothy Ahn. Why would you want to do this? Most people who go FHA do so to take advantage of the low down payment/interest rate, but the hard money loan is just the opposite of that. If you're going to live in the house, why pay closing costs for two loans? Just skip the hard money loan and buy with the FHA.
Besides, hard money lenders don't usually lend on owner-occupied properties, and FHA loans are only for owner-occupied properties. So it's typically one or the other.
Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
6y
Hi @Timothy Ahn. Why would you want to do this? Most people who go FHA do so to take advantage of the low down payment/interest rate, but the hard money loan is just the opposite of that. If you're going to live in the house, why pay closing costs for two loans? Just skip the hard money loan and buy with the FHA.
Besides, hard money lenders don't usually lend on owner-occupied properties, and FHA loans are only for owner-occupied properties. So it's typically one or the other.
@Kyle J.Thanks Kyle, that makes a lot of sense. Would I be able to cash back refinance on the FHA loan to get my money back for other investments? Or should I expect to just leave that in?
@Kyle J.Thanks Kyle, that makes a lot of sense. Would I be able to cash back refinance on the FHA loan to get my money back for other investments? Or should I expect to just leave that in?
Usually when you do a cash-out refi, you have a significant amount of equity in the property that you're trying to take advantage of. However, with a typical FHA loan, you'd be putting such a low amount down that you wouldn't really have enough equity in the property to even do a cash-out refi on.
@Kyle J. Makes sense. I guess I was just worried about tying up too much money since I am in the Socal area where a 3.5% dp on a typical $400,000 investment can still be $14,000.
Investor · Austin TX · Member since 2020 · 224 posts · 152 votes
6y
Here's the problem with skipping the hard money piece- FHA is not going to lend on many of the ultra distressed properties we target for BRRRR. however, FHA does have it's own rehab and construction loan programs for those who want to occupy. You might want to research that avenue.
Hi @Timothy Ahn. Why would you want to do this? Most people who go FHA do so to take advantage of the low down payment/interest rate, but the hard money loan is just the opposite of that. If you're going to live in the house, why pay closing costs for two loans? Just skip the hard money loan and buy with the FHA.
Besides, hard money lenders don't usually lend on owner-occupied properties, and FHA loans are only for owner-occupied properties. So it's typically one or the other.
Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
6y
you use hard money to buy a distressed asset that FHA won't lend on.
getting two loans is not ideal, but it will work. FHA is for owner occupied loans in good condition, hard money is for homes that need rehab.
if you can buy with an FHA loan then there is very unlikely to be any additional value to add and then extract. You want something in lousy condition that you can repair and that will require something with less stringent underwriting.
private money is a much better option but not as easy to obtain
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
6y
@Timothy Ahn
Sure for a brrr technique. Use the hml to buy a property that wouldn’t qualify for a conforming loan, fix it up, then refi into a conforming loan. If your numbers are right and you do the rehab smartly, you’ll get all your equity back out...
Couple things to realize... fha loans are for people with poor credit scores generally. If you can stomach 5% down and your credit is fine, do a conventional loan. It should be cheaper since the pmi is cheaper on the private market than backed by the govt (assuming your credit is fine). Also, the pmi comes off the conventional loan, it never comes off a govt backed loan like a fha. So, if you hold the property for more than say 7’ish years (I think that’s about ehere it works out on the amortization table), the conventional loan, already cheaper than fha to start, becomes even cheaper as the pmi comes off.
Talk to a lender to actually run your numbers. Message me if you want a referral for a conventional lender. Hml lender would need to be somebody local
@Matt Stricklen@Alexander Felice@David M.@Odie Ayaga Thanks guys, I was missing that benefit of hard money to being able to back super distressed properties, unlike FHA loans. @David M. also did not know the pmi never came off an FHA loan - thanks for the info!