Finally, on June 2, I closed escrow on my property purchase in San Diego—a significant investment goal I had been working towards. While this accomplishment is exciting, the process was strenuous and challenging. Today, I am grateful to share the valuable lessons I learned along the way.
Initially, I decided to work with my trusted lender, someone who had helped me close a prior FHA transaction two years ago. Since we had already established a relationship, and he was familiar with my financial history and background, I felt comfortable with this choice. However, I made a mistake by not obtaining a full loan approval from him before proceeding. Instead, I only had a conditional approval, which turned out to be mistake #1.
Once I found the property and had my offer approved, my lender began the process of obtaining full underwriting approval. However, this should have been done prior to entering into the transaction, rather than waiting until I was already under contract. Despite my lender's reliability and trustworthiness, he was extremely busy and often found it challenging to maintain focus and prioritize my case.
We swiftly completed the appraisal, inspections, and termite clearance. From there, it was up to the lender to handle his end of the deal. As he started putting everything together, he realized that this was not a simple transaction. It involved adhering to FHA guidelines for purchasing a duplex property in San Diego and ensuring that my income-to-debt ratios met the requirements. Given that I had three LLCs, multiple properties across the US, and a full-time job, securing loan approval required a comprehensive process.
Purchasing a duplex with an FHA loan is relatively easier than acquiring a triplex or a four-unit property. For three to four units, the rental income from the subject property must cover approximately 75-80% of the mortgage payments, making qualification nearly impossible. In contrast, for a duplex, you only need to demonstrate sufficient personal income, and you can also use additional income from one of the units to help qualify for the loan. However, there are additional considerations. If you have a business or multiple businesses like I do, FHA will examine the average income/losses over the past two years. If there are losses, they will affect your income. Moreover, if you own multiple properties, each one needs to be appraised, and you must show 25% equity in each property. If you don't meet this requirement, you will need to pay off the balance difference. Additionally, your lender may request a pay-off balance sheet for other mortgages you have, and obtaining this information can be challenging depending on your lender.
This transaction is not simple; it involves many moving pieces. However, with proper preparation and a competent lender, it can be successfully navigated. Unfortunately, my lender, despite our previous transaction, failed me this time and became a major source of stress throughout the process. After removing loan contingencies, my lender failed to deliver, leaving me and my deposit in a state of uncertainty. Luckily, the listing agent's lender stepped in and required me to proceed with their preferred lender. I agreed to this arrangement, finding some peace of mind in knowing that it might buy me a few extra days if needed.
Aware that I had only ten days to close this FHA transaction, the new lender took over the process and transitioned my file to their office. It was a power exchange, and I was impressed by how the new lender handled my case with diligence, efficiency, and attention to detail. I was well-informed about the status of my application and felt extremely comfortable moving forward and closing the transaction. Within ten days, they managed to move the entire file, collect all the necessary documents, and close the deal. Once the file migrated to the new lender, the transaction proceeded smoothly.
Here are the most important lessons I learned during the purchase of my new investment property:
- 1. Obtain full underwriting approval before submitting an offer: While it may seem unnecessary, individuals with multiple businesses, properties, and various sources of income must ensure their income is sufficient for loan approval.
- 2. Find a reputable lender: Just because you closed a prior transaction with a lender does not necessarily mean they are still the best choice for you.
- 3. Have a reliable CPA: Your CPA should be your trusted confidant, ensuring that the backend of your income has a strong foundation to support your loan needs.
- Avoid unnecessary stress: Remember that your health is the most important aspect, and everything else can be taken care of with ease.
Very few people discuss how stressful and challenging it is to obtain a mortgage. Throughout the process, it is crucial to seek support from brokers, agents, lenders, CPAs, as well as friends and family. Those of us who have experienced it firsthand understand the immense difficulty involved and deserve recognition for successfully navigating this complex endeavor.
