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Updated about 2 years ago on . Most recent reply

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27
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Shane Bishop
  • Investor
  • Greenville, SC
15
Votes |
27
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FHA vs. Conventional Loan: Which is better?

Shane Bishop
  • Investor
  • Greenville, SC
Posted

Hello everyone,

My wife and I are just starting out on our real estate investment journey and on the Bigger Pockets podcast, it seems that they highly recommend using a FHA loan when starting out and purchasing a multifamily property. However, when doing comparisons, it seems that a conventional loan could save you money in the long run. Wanted to ask the community on what the pros and cons are of each and why it may be smarter to go with one strategy versus the other!


Thanks!

Shane

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536
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Carlos Valencia
  • Lender
  • 92703
536
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326
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Carlos Valencia
  • Lender
  • 92703
Replied

Hello Shane, 

FHA is a great product to use to house hack as it allows you to invest with 3.5% down payment. When investing in multifamily property theres some things to consider when using FHA. When you use FHA for a 3-4 unit property you have to pass the self sufficiency test. The self-sufficiency test is to prove that 75% of the rental income you'll receive will cover the full monthly mortgage PITI (Principal, Interest, Taxes, Insurance payment. For example lets say your mortgage payment of PITI is 3k you have to make sure that the 75% rental income will cover that whole number of 3K. Meaning that if you have a fourplex and are able to get $1,200 in rents for all the units you will be at $4,800 X75% =3,600 In this example you would pass the self-sufficiency test with flying colors. As long as your rents are equal or more you will pass. Make sure to look out for that when your out there looking for a 3-4 unit property. If you buy a duplex this does not apply.

Conventional to but a multifamily you will need 15% -25% down to get into your first multifamily. No need for a self sufficiency-test. 

It will really depend on how your market is to see what option will fit best for your scenario. Hope this provides a little more clarity to figure out what option is best for you. 

@Albert Bui @Matthew Kwan

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