All Forum Posts by: Albert Bui

Right the MMI on FHa is now for life if you put less than 10% down but realistically only maybe 2% of people using FHA put more than 3.5% down unless its for a strategic reason.

If you have superb credit I would recommend you use 5% down payment and payoff the MI through whats called single premium lender paid mortgage insurance this is done by raising the rate high enough to absorb the mortgage insurance for instance instead of 4.75% you can opt for 5.125% and it will pay for the MI off for the rest of the life of the loan, or you can keep 4.75% but pay the SPMI in cash, or pay the stereotypical method of monthly mortgage insurance.

If you're going from FHA to FHa refi thats a different story (streamline FHA refi).

There is no instruction on the guidelines that specifically states how many months need to be received in order to "not," have to require the vacated property owner to prove 25% equity in the case of FHA or 30% in the case of conventional financing for the use of rental income.

My particular head conventional underwriter called Fannie Mae and following the call she said shed feel comfortable with 6 months receipt however you may find a bank with less or more like Mike mentioned above, 12 in his case. That may very well be the case with how much risk his bank may want to take with potential "representations and warrants" with Fannie Mae. At the end of the day each bank will have their own risk preferences within the guidelines allowed by FNMA.

so how the property will look (prior to you actually filing tax returns on this property) is 1500 income X 75% = 1125 - 1400 PITIA = -275 per month. This -275 is added to the figure you have to qualify for.

So if you have no other obligations (credit cards, car loans, etc) and lets say your new home is 1500 PITIA then you'd need to qualify for 1500 + 275 (negative net rents) = 1775 / 43% max DTI = 4127.91 min gross monthly income needed to qualfy or X 12 = 49,534.88.

Keep in mind that is using the conservatife figure of 43% its currently 45% on conventional financing. You can get conventional to go up to 50% DTI if you have 12 months reserves of PITIA in cash or other forms + 20% down payment and a fairly decent credit score.

If you find your DTI is too high you can use FHA but the mortgage insurance is not cheap since the DTI can go up to 55%.

The above assumes you go rent for 6 months min or live with relatives/parents and then go buy again. I would make sure to keep impeccable records of bank statements evidencing the receipt of rental income each month for 6 consecutive months, provide lease agreement all pages for 1500, and copy of security deposit (cancelled check - make sure not to collect cash).

Good Luck

Tomasz you're in luck.....

The factors in this are:

- what are your other sources of income, wages, and etc (trying to determine your debt to income?

- what are your other min monthly obligations?

- what is the PITIA (principal/interest/taxes/insurance/assessments) of this property you're trying to convert into a rental and what is the gross rental rate in this area?

- if you dont have 25% equity documented in the recently converted rental you will not be able to use gross rents X 75% - the PITIA of the property AKA ... you will have to qualify for the entire PITIA with your earned/ordinary/wages/etc

- If you move back to your parents or a rental/apartment then we'll need 6 months (grey area - my underwriters comfort zone) of rental receipt before we can use gross rent X 75% - PITIA with out evidence of 25% equity. So this is key if you do not have the equity to document you will want to want to keep good records of rental income receipts for 6+ months (perhaps separate bank accounts for rentals recommended).

*FHA is not for first time buyers only its for primary residences only. You can use FHA on your next purchase or conventional the advantage of FHA is that it gives you more leverage and can qualify to 55% DTI max while conventional will max usually at 43% come January 10th. FHA has a higher effective cost when factoring in the monthly mortgage insurance for the life of the loan versus the conventional equivalent, but conv requires 5% min down and is stricter on credit.

At the end of the day as long as the debt to income ratios work you can qualify for another primary but it has to be strategically planned. since you're risking your qualification and your capital you're going to want a lender who understands the underwriting process for non owner occupied scenarios with great depth.

HI Michael,

I am sure an attorney would be better at answering why have a LLC at all, but I can say from the lending end that it makes it more difficult to obtain 1-4 unit agency financing.

Portfolio, commercial, and business loans can be obtained on entities after you let the bank's general counsel review your entity usually (fee for this 250-400 per entity).

From a why LLC point from my experience and what I've worked heres what Ive heard:

- protection: it protects for external liability if structured correctly, then again insurance can provide coverage as well. It depends on how many layers of protection makes you feel cozy, a personal decision for each person.

- estate planning purposes: my estate planner on my team has used LLC's to gift certain shares of assets and was able to discount the value of those assets from 10-25% under the premise of limited marketability and limited control so in essence they were able to gift essentially more of that asset (14k gift rules for 2014 per year on top of the 5.25 mil one time life exclusion).

- flexibility since like Steven mentioned LLC's can be taxed as S or C corp or partnership allowing you to mold the entity to your uses with out having to recreate or cancel entities perhaps

- privacy - some states allow you to have a resident manager/member to shield who the actual owner is (you) which just makes it harder to find your assets for a case in a lawsuit using combinations of trusts and entities etc

I've never heard that by obtaining leverage against a property would lower basis perhaps depreciating can lower basis or converting a primary residence to a rental would lower basis to the lower of fair market value or acquisition cost but cash out lowering basis?

You can transfer it to a LLC post closing, atleast with my bank. We're a direct lender of agency products Fannie/Freddie/Ginnie and some specific portfolio/jumbo products as well. Our general counsel has mentioned that as long the loan is current a transfer to your LLC as long as you retain title to the LLC as well would be fine.

I cannot say this for each banker/servicer so I would check with your bank as well as their policies may be different.

@Allen Keys - FHA is still 3.5% down payment perhaps there was a confusion with conventional financing for SFR since that went from 3% down min up to 5% down (11/16/13) for conforming loans up to 417,000 but that is in reference to 1 unit properties up to the conforming limit of 417,000.

Even 4 units on the conforming limit is around 801k max, however loan limits may vary from county to county the min % down payments do not.

(assumes high cost areas in CA - county loan limits)

Welcome to bp Matt,

Like you, I did some analysis on the local market here as well and especially in Huntington Beach the ratio of gross rents to sales price is just too off that you'd have to manage and fix your own property in order to just break even. As soon as I try to factor in property management, vacancy, or repairs, I was deep in the red.

Depending on your loan amount Matt you may be able to cash out up to 75% LTV or 801k in orange county on 4 units, above this amount will require a portfolio lender or subject you to different products as opposed to conventional financing.

@Steven -

Perhaps in different states there could be a transfer tax however my clients have not incurred this transfer tax in CA as long as they could prove that the borrower and the entity/LLC are one in the same. It may vary from state to state, perhaps Illinois?

LLC in this context is partnership as he said it was his brother and him however who knows it could be 100% his brother and perhaps he only has a equity stake but no legal ownership and it could be a disregarded entity for tax purposes.

In regards to the basis being lowered, this has not been my experience. In what specific instance is the basis being lowered for a transfer from a persons name to their self owned LLC/partnership (split basis to partners?)?

@Daven - yes there are banks that can fund in your LLC's name. However most of the banks that can do this are portfolio lenders and the loans are usually adjustable rate loans with interim fixed periods. The advantage of having it in your own name would be to open yourself up to conventional financing which has 30 year fixed terms and are less risky for long term hold properties if that is your main intent.