FHA loan use for rentals/primary residence

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FHA loan use for rentals/primary residence

Jackson Vasey
Member since 2021 · 4 posts · 0 votes

So I've done some research but I have a few questions regarding FHA loans. I currently am saving money for a downpayment(I don't own a home currently). I intend on purchasing a home then living in it for a year and then if I understand correctly I can then purchase another home using an FHA approved loan assuming I live in the new home for atleast a year. This would allow me to purchase a new property every year or 2, granted I'd have to live in that new home for atleast a year and that would allow me to rent out the old property. From my understanding this type of loan also applies to duplex's and even triplex's as long as I occupy one of the units for atleast a year. Any advice or input on other strategies would be appreciated. For reference I live in Central FL, I am 21 so I don't need to get a lot of properties fast using crazy risky methods or anything, also don't have any interest in buying larger properties with partners.

Thanks for any input 

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Zack KarpPro Member
Lender · Schaumburg, IL · Member since 2015 · 833 posts · 774 votes
4y

@Jackson Vasey this is called the BRRRR method. Buy, Rehab, Rent, Refi, Repeat. But here's the catch...you cannot have more than 1 FHA loan at a time (unless you relocate 100 miles away).

So if you buy with FHA and put 3.5% down, in order to refinance out of FHA into a Conventional loan, for a 2-unit it's 85% max LTV and 3-4 unit max 80% LTV. And that's if you refi as a primary residence, and starting a new 1-year clock. Otherwise if you refi as an investment property, it's 75% max LTV for a 2-4 unit.

Kind of changes things a bit, huh? So you would need to create anywhere from 11.5% - 21.5% equity in order to do the "Repeat" of this BRRRR method. Which is why the Rehab part is essential to this method working, because without forcing appreciation, it's pretty hard to gain that much equity in 1 year.

There is also another loan product called Home Possible which is a Conventional loan that allows 5% down on a 2-4 unit, as long as your income is below a certain cap (depends on geographical area of the property). The great thing about HP is that it allows you to buy another 1-2 properties with a low down payment in addition to FHA, as long as you can stay under the income cap.

The most critical thing to using any of these strategies is to align yourself with the right investor-friendly loan officer so that you don't get stuck. Without the right advice, you might have just gone and bought that first property with FHA, and then found out later that you couldn't just buy property #2 with FHA.

If you want to map out a strategy that pertains to your situation, I'm happy to discuss further, feel free to reach out.

Best of luck!

847-387-5513
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  • Eric Kump
    Lender · Mesa, AZ · Member since 2018 · 69 posts · 24 votes
    4y

    Hey Jackson, I am a lender and I cover FL. If you are a first time homebuyer and have a credit score above 620 you can actually go as low as 3% on the down payment for a conventional loan as opposed to the 3.5% with FHA. The main thing lenders are going to look at for either loan is your credit score, debt to income ratio, and amount you can bring for a down payment.

    But yes as far as I am aware you can move out of your primary residence to a new one as you have mentioned numerous times as long as you meet the seasoning requirements. 


    I hope this helps, feel free to message me with any other questions!

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  • Jackson Vasey
    OP
    Member since 2021 · 4 posts · 0 votes
    4y

    Appreciate the advice Eric. Yeah my credit score is just above a 750. I would be putting down more than 3% and less than 20%. You have any possible other strategies that might work better? Especially when it comes to negating or making my money stretch the furthest when it comes to debt to income ratio?

    0Reply
  • Ty AshBusiness Member
    Real Estate Agent · Milwaukee, WI · Member since 2018 · 201 posts · 132 votes
    4y

    @Jackson Vasey

    Looking forward to hear your success story once you close on your first deal! I bought my first deal using an FHA loan about 4 years ago now. I believe that you can only have one FHA loan per person (fact check me here) but as @Eric Kump mentioned, these days you can get low % down conventional loans as well. I would recommend going the conventional route as PMI (private mortgage insurance) can be removed on a conventional mortgage without refinancing whereas most FHA products will likely require a ReFi later on and it's anyone's guess what interest rates will be 8-10 years from now when you're at that 20% equity mark.

    Another question you had was type of property you can buy. With FHA and Conventional, up to a four plex should be available to you. If you intend to buy at least 4 investment properties, a common strategy to maximize your debt to income limitations is to go 4-3-2-1 (assuming that a four plex will cost the most and a single family the least in terms of purchase price). This gets you 10 units if you move every other year by the time that you're thirty. Pay those suckers down with the cash flow and you're likely going to be financially independent in no time or..... leverage the equity you're building through tenant's paying down your principal and invest in more/bigger properties.

    Hope that this helps, best of luck!

    2Reply
  • Jackson Vasey
    OP
    Member since 2021 · 4 posts · 0 votes
    4y

    @Ty Ash

    Noted, yeah the 4-3-2-1 sounds like a method I will look into. I appreciate the advice.

    0Reply
  • Zack KarpPro Member
    Lender · Schaumburg, IL · Member since 2015 · 833 posts · 774 votes
    4y

    @Jackson Vasey this is called the BRRRR method. Buy, Rehab, Rent, Refi, Repeat. But here's the catch...you cannot have more than 1 FHA loan at a time (unless you relocate 100 miles away).

    So if you buy with FHA and put 3.5% down, in order to refinance out of FHA into a Conventional loan, for a 2-unit it's 85% max LTV and 3-4 unit max 80% LTV. And that's if you refi as a primary residence, and starting a new 1-year clock. Otherwise if you refi as an investment property, it's 75% max LTV for a 2-4 unit.

    Kind of changes things a bit, huh? So you would need to create anywhere from 11.5% - 21.5% equity in order to do the "Repeat" of this BRRRR method. Which is why the Rehab part is essential to this method working, because without forcing appreciation, it's pretty hard to gain that much equity in 1 year.

    There is also another loan product called Home Possible which is a Conventional loan that allows 5% down on a 2-4 unit, as long as your income is below a certain cap (depends on geographical area of the property). The great thing about HP is that it allows you to buy another 1-2 properties with a low down payment in addition to FHA, as long as you can stay under the income cap.

    The most critical thing to using any of these strategies is to align yourself with the right investor-friendly loan officer so that you don't get stuck. Without the right advice, you might have just gone and bought that first property with FHA, and then found out later that you couldn't just buy property #2 with FHA.

    If you want to map out a strategy that pertains to your situation, I'm happy to discuss further, feel free to reach out.

    Best of luck!

    847-387-5513
    2Reply
  • Eric Kump
    Lender · Mesa, AZ · Member since 2018 · 69 posts · 24 votes
    4y
    Originally posted by @Jackson Vasey:

    Appreciate the advice Eric. Yeah my credit score is just above a 750. I would be putting down more than 3% and less than 20%. You have any possible other strategies that might work better? Especially when it comes to negating or making my money stretch the furthest when it comes to debt to income ratio?

    When you put under 20% down on a convential loan you have what is called private mortgage insurance. It is a monthly payment that you pay until you reach 20% equity in the home which could take several years. This could be anywhere from $70-$200+ depending on your loan size. You pay this in addition to your principal and interest payment, homeowners insurance, and property taxes. If the value in your home increases you could always refinance and get the PMI taken off quicker. You can even refinance within 6 months of owning the home. Thats what I did last month, I lived in the home for about 18 months, made home improvements and did a cash out refinance. The value of my home grew about 200k from when I bought (its a crazy market out here in AZ). I was able to take out 110k and am going to put it into an investment property. So, 3% down let me to eventually pull out over 100k (this is making money go further)

    If you were to put 10 or 15% down the lender may give you a better interest rate, typically the more you put down the better the rate is the first time around. 

    In my case, I preferred to put the minimum down so that I still had money for unknown housing expenses, those occur often when you first buy a home!!

    1Reply
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