Getting out of FHA Loan after HouseHack?
Most Popular Reply
Real Estate Broker 路 3412 S. Harlem Avenue Riverside, IL 60546 路 Member since 2015 路 6k+ posts 路 5k+ votes
3y@Alex Pepe you have received a lot of solid advice here. I have seen several of my clients who did BRRRR deals using FHA. Normally it took maybe 2 or 3 years for the equity to be there for them to refinance out. I am here in the Chicago market, so we have seen some very nice appreciation too. The thing with FHA is is that you are normally buying a property that is in really good shape. FHA makes it challenging to buy a fixer upper, so to add value you normally would have to do cosmetic remodeling OR wait for the market appreciation to deflate the value of your 1st loan so that you have that 25-30% equity cushion you need.
22 Replies
- Realtor 路 Hanover Twp, PA 路 Member since 2018 路 3k+ posts 路 3k+ votes3y
@Alex Pepe, I don't believe there are any prepayment penalties on FHA loans. So, yes in theory you could refinance after a year.
The question is, is it likely to make sense? Typically people use an FHA loan for the low down payment. In order to refinance into a conventional loan the house would have to go up in value by almost 20%. Very unlikely to happen in 1 year.
Also, with an FHA loan these days, I believe you pay a chunk of PMI at closing and then a monthly PMI as well. By taking out a second FHA loan you would be paying that chunk of PMI at closing twice.
You are likely better off using a conventional loan for the 2nd purchase. If its for a primary residence, you can probably find a loan with a 5% down payment albeit with a limitation of 3% seller assist.
You mention a HELOC. What equity would you use for a HELOC? With an FHA loan you likely put little down, paid very little off within 1 year. You likely have no equity you can tap with a HELOC at that point.
- Lender 路 Washington DC 路 Member since 2015 路 2k+ posts 路 2k+ votes3y
You paid 1.75% for the PMI on FHA and likely 3.5 down. There is probably not enough equity to refinance conventional OR get a HELOC. To refinance conventional and get rid of mortgage insurance you need 80% loan to value. You can refinance to conventional at 90 but the mortgage insurance is often higher. You will need to go down in rate for it to be sensible to an Underwriter. Also the costs of two loans at $3000 or more each is added to balance.
Say you buy a $600000 house and you owe $585000 in a year you owe $584996. You will need the value to be something like $740000 to refinance and do another low down payment government/conventional loan. Markets are not increasing like that so you will need to add square footage to make the appraisal higher. $585000+ 6000 costs
Your departing property is appraised when you buy another low down payment property. The departing property also needs market rents to cover the PITI plus any HOA for you to qualify. Also you will need to write a letter of explanation such as job transfer or growing family size for it to make sense. If market rents don't cover the PITI (which is typical) that loss hits your debt to income ratio. In a year you need higher income or less debt if your ratios were tight. Not impossible but unlikely plan considering values are not increasing.
HELOC you need 721 score and goes to 90% which will be hard to hit in 2023 as you owe 98% from the start.
- Member since 2022 路 24 posts 路 9 votes3yIf I were to buy a fixer upper prop for 250 with 3.5 down, in a neighborhood were most properties are in the high 300's to low 400's. Rehab the property while living in it and increase the value to low to mid 3's, (maybe even convert the garage to a unit) I would be able to increase equity enough to refi?
Quote from @Kevin Sobilo:
@Alex Pepe, I don't believe there are any prepayment penalties on FHA loans. So, yes in theory you could refinance after a year.
The question is, is it likely to make sense? Typically people use an FHA loan for the low down payment. In order to refinance into a conventional loan the house would have to go up in value by almost 20%. Very unlikely to happen in 1 year.
Also, with an FHA loan these days, I believe you pay a chunk of PMI at closing and then a monthly PMI as well. By taking out a second FHA loan you would be paying that chunk of PMI at closing twice.
You are likely better off using a conventional loan for the 2nd purchase. If its for a primary residence, you can probably find a loan with a 5% down payment albeit with a limitation of 3% seller assist.
You mention a HELOC. What equity would you use for a HELOC? With an FHA loan you likely put little down, paid very little off within 1 year. You likely have no equity you can tap with a HELOC at that point.
- Member since 2022 路 24 posts 路 9 votes3y
Quote from @Caroline Gerardo:
You paid 1.75% for the PMI on FHA and likely 3.5 down. There is probably not enough equity to refinance conventional OR get a HELOC. To refinance conventional and get rid of mortgage insurance you need 80% loan to value. You can refinance to conventional at 90 but the mortgage insurance is often higher. You will need to go down in rate for it to be sensible to an Underwriter. Also the costs of two loans at $3000 or more each is added to balance.
Say you buy a $600000 house and you owe $585000 in a year you owe $584996. You will need the value to be something like $740000 to refinance and do another low down payment government/conventional loan. Markets are not increasing like that so you will need to add square footage to make the appraisal higher. $585000+ 6000 costs
Your departing property is appraised when you buy another low down payment property. The departing property also needs market rents to cover the PITI plus any HOA for you to qualify. Also you will need to write a letter of explanation such as job transfer or growing family size for it to make sense. If market rents don't cover the PITI (which is typical) that loss hits your debt to income ratio. In a year you need higher income or less debt if your ratios were tight. Not impossible but unlikely plan considering values are not increasing.
HELOC you need 721 score and goes to 90% which will be hard to hit in 2023 as you owe 98% from the start.
Do the rents need to cover the PITI while I am living in the prop or could I show that they would cover them after I move out?
- Realtor 路 Hanover Twp, PA 路 Member since 2018 路 3k+ posts 路 3k+ votes3y
Quote from @Alex Pepe:
If I were to buy a fixer upper prop for 250 with 3.5 down, in a neighborhood were most properties are in the high 300's to low 400's. Rehab the property while living in it and increase the value to low to mid 3's, (maybe even convert the garage to a unit) I would be able to increase equity enough to refi?Quote from @Kevin Sobilo:
@Alex Pepe, I don't believe there are any prepayment penalties on FHA loans. So, yes in theory you could refinance after a year.
The question is, is it likely to make sense? Typically people use an FHA loan for the low down payment. In order to refinance into a conventional loan the house would have to go up in value by almost 20%. Very unlikely to happen in 1 year.
Also, with an FHA loan these days, I believe you pay a chunk of PMI at closing and then a monthly PMI as well. By taking out a second FHA loan you would be paying that chunk of PMI at closing twice.
You are likely better off using a conventional loan for the 2nd purchase. If its for a primary residence, you can probably find a loan with a 5% down payment albeit with a limitation of 3% seller assist.
You mention a HELOC. What equity would you use for a HELOC? With an FHA loan you likely put little down, paid very little off within 1 year. You likely have no equity you can tap with a HELOC at that point.
@Alex Pepe, typically you can't buy a fixer upper with an FHA loan because they require the property to be in good functional safe condition for someone to live in.
- Member since 2022 路 24 posts 路 9 votes3y
Quote from @Kevin Sobilo:
Quote from @Alex Pepe:
If I were to buy a fixer upper prop for 250 with 3.5 down, in a neighborhood were most properties are in the high 300's to low 400's. Rehab the property while living in it and increase the value to low to mid 3's, (maybe even convert the garage to a unit) I would be able to increase equity enough to refi?Quote from @Kevin Sobilo:
@Alex Pepe, I don't believe there are any prepayment penalties on FHA loans. So, yes in theory you could refinance after a year.
The question is, is it likely to make sense? Typically people use an FHA loan for the low down payment. In order to refinance into a conventional loan the house would have to go up in value by almost 20%. Very unlikely to happen in 1 year.
Also, with an FHA loan these days, I believe you pay a chunk of PMI at closing and then a monthly PMI as well. By taking out a second FHA loan you would be paying that chunk of PMI at closing twice.
You are likely better off using a conventional loan for the 2nd purchase. If its for a primary residence, you can probably find a loan with a 5% down payment albeit with a limitation of 3% seller assist.
You mention a HELOC. What equity would you use for a HELOC? With an FHA loan you likely put little down, paid very little off within 1 year. You likely have no equity you can tap with a HELOC at that point.
@Alex Pepe, typically you can't buy a fixer upper with an FHA loan because they require the property to be in good functional safe condition for someone to live in.
It would still be livable, just in need of paint, modern amenities, new floors.
- Member since 2022 路 64 posts 路 35 votes3y
Quote from @Kevin Sobilo:
Quote from @Alex Pepe:
If I were to buy a fixer upper prop for 250 with 3.5 down, in a neighborhood were most properties are in the high 300's to low 400's. Rehab the property while living in it and increase the value to low to mid 3's, (maybe even convert the garage to a unit) I would be able to increase equity enough to refi?Quote from @Kevin Sobilo:
@Alex Pepe, I don't believe there are any prepayment penalties on FHA loans. So, yes in theory you could refinance after a year.
The question is, is it likely to make sense? Typically people use an FHA loan for the low down payment. In order to refinance into a conventional loan the house would have to go up in value by almost 20%. Very unlikely to happen in 1 year.
Also, with an FHA loan these days, I believe you pay a chunk of PMI at closing and then a monthly PMI as well. By taking out a second FHA loan you would be paying that chunk of PMI at closing twice.
You are likely better off using a conventional loan for the 2nd purchase. If its for a primary residence, you can probably find a loan with a 5% down payment albeit with a limitation of 3% seller assist.
You mention a HELOC. What equity would you use for a HELOC? With an FHA loan you likely put little down, paid very little off within 1 year. You likely have no equity you can tap with a HELOC at that point.
@Alex Pepe, typically you can't buy a fixer upper with an FHA loan because they require the property to be in good functional safe condition for someone to live in.
Couldn't he do an FHA 203k loan if it was a fixer upper? I know those can be a ton of paperwork and you have to get a contractor that is okay with doing it. But pretty sure it's an option.
- Investor 路 Austin, TX 路 Member since 2021 路 9k+ posts 路 5k+ votes3y
Make sure this is a possibility by talking to a lender, a few other factors play in to this. Happy to connect you with mine
- Member since 2022 路 64 posts 路 35 votes3y
Quote from @Caroline Gerardo:
You paid 1.75% for the PMI on FHA and likely 3.5 down. There is probably not enough equity to refinance conventional OR get a HELOC. To refinance conventional and get rid of mortgage insurance you need 80% loan to value. You can refinance to conventional at 90 but the mortgage insurance is often higher. You will need to go down in rate for it to be sensible to an Underwriter. Also the costs of two loans at $3000 or more each is added to balance.
Say you buy a $600000 house and you owe $585000 in a year you owe $584996. You will need the value to be something like $740000 to refinance and do another low down payment government/conventional loan. Markets are not increasing like that so you will need to add square footage to make the appraisal higher. $585000+ 6000 costs
Your departing property is appraised when you buy another low down payment property. The departing property also needs market rents to cover the PITI plus any HOA for you to qualify. Also you will need to write a letter of explanation such as job transfer or growing family size for it to make sense. If market rents don't cover the PITI (which is typical) that loss hits your debt to income ratio. In a year you need higher income or less debt if your ratios were tight. Not impossible but unlikely plan considering values are not increasing.
HELOC you need 721 score and goes to 90% which will be hard to hit in 2023 as you owe 98% from the start.
Would he have to pay the 1.75% PMI at closing?
- Lender 路 Washington DC 路 Member since 2015 路 2k+ posts 路 2k+ votes3y
@Kyle S. When he purchased he paid upfront PMI plus a monthly premium. With FHA you are stuck with those costs until you sell or refinance conventional. Cost to refinance is not cheap and with rates rising lenders want to see he is lowering his payment if loan to value is higher than 80%. Borrower has to qualify again so credit better than before and income stream same or better.
- Lender 路 Washington DC 路 Member since 2015 路 2k+ posts 路 2k+ votes3y
@Alex Pepe if you are buying another house you have to qualify with verified income. If the rents don't cover the total payment you need increased income. People who buy with FHA are often at the maximum debt to income ratio. To take on more debt in a year you need a higher salary to cover any negative not covered by market rents. You need to provide: actual lease, deposit check cashed, appraiser does a rent survey form 1007 to match.
- Realtor 路 Hanover Twp, PA 路 Member since 2018 路 3k+ posts 路 3k+ votes3y
Quote from @Kyle S.:
Quote from @Kevin Sobilo:
Quote from @Alex Pepe:
If I were to buy a fixer upper prop for 250 with 3.5 down, in a neighborhood were most properties are in the high 300's to low 400's. Rehab the property while living in it and increase the value to low to mid 3's, (maybe even convert the garage to a unit) I would be able to increase equity enough to refi?Quote from @Kevin Sobilo:
@Alex Pepe, I don't believe there are any prepayment penalties on FHA loans. So, yes in theory you could refinance after a year.
The question is, is it likely to make sense? Typically people use an FHA loan for the low down payment. In order to refinance into a conventional loan the house would have to go up in value by almost 20%. Very unlikely to happen in 1 year.
Also, with an FHA loan these days, I believe you pay a chunk of PMI at closing and then a monthly PMI as well. By taking out a second FHA loan you would be paying that chunk of PMI at closing twice.
You are likely better off using a conventional loan for the 2nd purchase. If its for a primary residence, you can probably find a loan with a 5% down payment albeit with a limitation of 3% seller assist.
You mention a HELOC. What equity would you use for a HELOC? With an FHA loan you likely put little down, paid very little off within 1 year. You likely have no equity you can tap with a HELOC at that point.
@Alex Pepe, typically you can't buy a fixer upper with an FHA loan because they require the property to be in good functional safe condition for someone to live in.
Couldn't he do an FHA 203k loan if it was a fixer upper? I know those can be a ton of paperwork and you have to get a contractor that is okay with doing it. But pretty sure it's an option.
@Kyle S., sure but I don't think that is what he was talking about. He could also try to get a hard money loan. I've never actually seen anyone use a 203k loan. They get talked about a lot but not used very often because of the hassles.
- Realtor 路 Hanover Twp, PA 路 Member since 2018 路 3k+ posts 路 3k+ votes3y
Quote from @Alex Pepe:
Quote from @Kevin Sobilo:
Quote from @Alex Pepe:
If I were to buy a fixer upper prop for 250 with 3.5 down, in a neighborhood were most properties are in the high 300's to low 400's. Rehab the property while living in it and increase the value to low to mid 3's, (maybe even convert the garage to a unit) I would be able to increase equity enough to refi?Quote from @Kevin Sobilo:
@Alex Pepe, I don't believe there are any prepayment penalties on FHA loans. So, yes in theory you could refinance after a year.
The question is, is it likely to make sense? Typically people use an FHA loan for the low down payment. In order to refinance into a conventional loan the house would have to go up in value by almost 20%. Very unlikely to happen in 1 year.
Also, with an FHA loan these days, I believe you pay a chunk of PMI at closing and then a monthly PMI as well. By taking out a second FHA loan you would be paying that chunk of PMI at closing twice.
You are likely better off using a conventional loan for the 2nd purchase. If its for a primary residence, you can probably find a loan with a 5% down payment albeit with a limitation of 3% seller assist.
You mention a HELOC. What equity would you use for a HELOC? With an FHA loan you likely put little down, paid very little off within 1 year. You likely have no equity you can tap with a HELOC at that point.
@Alex Pepe, typically you can't buy a fixer upper with an FHA loan because they require the property to be in good functional safe condition for someone to live in.
It would still be livable, just in need of paint, modern amenities, new floors.
@Alex Pepe, that isn't what most people would call a fixer upper. Thats just a modestly dated house. A fixer upper is usually distressed and often in a completely unlivable condition.
The kind of light rehab you're talking about isn't likely to create too more equity than you invest into the purchase + rehab in most cases.
- Member since 2022 路 64 posts 路 35 votes3y
Quote from @Caroline Gerardo:
@Kyle S. When he purchased he paid upfront PMI plus a monthly premium. With FHA you are stuck with those costs until you sell or refinance conventional. Cost to refinance is not cheap and with rates rising lenders want to see he is lowering his payment if loan to value is higher than 80%. Borrower has to qualify again so credit better than before and income stream same or better.
So, would a 5% conventional loan actually be cheaper at closing if they don't have to pay the 1.75% for PMI or are they still paying that PMI% at closing because they are paying less then 20%?
- Lender 路 Washington DC 路 Member since 2015 路 2k+ posts 路 2k+ votes3y
Conventional loan is cheaper in long run BUT FICO requirement higher, Debt to income ratio hard fast max 43. Conventional when you get to the 79.9% LTV the MI payment goes away thus saving money without refinancing.
While FHA lower FICO allowed, 51 DTI, ins and outs of gifts easier, but a little tighter on property condition. PMI is permanent on FHA.
The choice is sometimes made by what a person's situation is at the moment. @Kyle S. When you need to close in 27 days you cannot change your credit score or income. A lender can juggle the fire insurance or rate or factors to change the DTI by 1-3% but to change from 51 down to 43 is a giant difference or 8%
- Member since 2022 路 64 posts 路 35 votes3y
Quote from @Caroline Gerardo:
Conventional loan is cheaper in long run BUT FICO requirement higher, Debt to income ratio hard fast max 43. Conventional when you get to the 79.9% LTV the MI payment goes away thus saving money without refinancing.
While FHA lower FICO allowed, 51 DTI, ins and outs of gifts easier, but a little tighter on property condition. PMI is permanent on FHA.
The choice is sometimes made by what a person's situation is at the moment. @Kyle S. When you need to close in 27 days you cannot change your credit score or income. A lender can juggle the fire insurance or rate or factors to change the DTI by 1-3% but to change from 51 down to 43 is a giant difference or 8%
Interesting that helps a ton, thank you! Might almost be smart to be buy with conventional for your first and buy with FHA for your second since the DTI requirements are lower, so might make getting approved easier.
- Real Estate Broker 路 3412 S. Harlem Avenue Riverside, IL 60546 路 Member since 2015 路 6k+ posts 路 5k+ votes3y
@Alex Pepe you have received a lot of solid advice here. I have seen several of my clients who did BRRRR deals using FHA. Normally it took maybe 2 or 3 years for the equity to be there for them to refinance out. I am here in the Chicago market, so we have seen some very nice appreciation too. The thing with FHA is is that you are normally buying a property that is in really good shape. FHA makes it challenging to buy a fixer upper, so to add value you normally would have to do cosmetic remodeling OR wait for the market appreciation to deflate the value of your 1st loan so that you have that 25-30% equity cushion you need.
- Rental Property Investor 路 Lebanon, OH 路 Member since 2016 路 45 posts 路 47 votes3y
Side question, When you talk of house hacking and conversions be sure you are allowed to do such a "househack" properties not zone to be multi family can't just be converted. Remember protect your money before you spend it.
- 3yChristina BurganPro MemberMember since 2019 路 2 posts 路 1 vote
@Alex Pepe
It is a good strategy as long as your adding value to the house while you live there. You can absolutely get an FHA on a fixer upper - FHA requires the house to be liveable, not pretty.
I speak from my BRRR experience. I got a FHA loan for a duplex and when I refinanced this past December I got a great conventional loan interest rate because it was my primary residence. I am now looking to move and do the same but with a triplex.
Good luck 馃憤
- 3yTy AshBusiness MemberReal Estate Agent 路 Milwaukee, WI 路 Member since 2018 路 201 posts 路 132 votes
Hi @Alex Pepe!
I believe you've received this input in a few different ways but here's my take.
The goal of a BRRRR is to reduce the total amount of capital with a "home run" being a deal where you leave little to no money in. With an FHA house hack, it's already a home run in my mind, especially if you have "meat on the bone" to make cosmetic updates and increase the rents.
Build your property reserves to a healthy spot after raising your rents, rebuild your runway to buy your next deal, and let the snow ball start doing it's job. You're in the beginning stages so it will feel slow but after looking back 5 years, you'll be amazed with your progress.
Best of luck and here for any questions along the way!
- 3yJordan MoorheadBusiness MemberReal Estate Agent 路 Austin, TX 路 Member since 2015 路 5k+ posts 路 3k+ votes
@Alex Pepe I've done this a few times. I have bought 3 with FHA loans. I've sold one and refinanced 2 into conventional loans so I can use FHA loans again. I don't recommend using a heloc for a down payment, those rates adjust and you can put yourself in a tight position. Refinance and lock in long term debt so you know the cost.
The Moorhead Team5140 Reviews - 3yShawn McenteerBusiness MemberRealtor 路 Boonton Township, NJ 路 Member since 2013 路 2k+ posts 路 1k+ votes
Hi @Alex Pepe low money down conventional mortgages tend to be best route for multi and single family owner occupied house hacks. 98% of lenders claim these loan do not exist, very few lenders offer them but I will let you know these types of are out there. I avoid FHA a much as possible and so do all my clients but first gotta find the lender issue these types of loans. Even on a site like BP very very few lender have this type of program.
House Hacking New Jersey563 Reviews
Join the conversationCreate a free account to reply, vote on answers and follow this thread.