Hi everyone! I've read good information on here about FHA loans and Im trying my best to learn as I'm new to this world.
My wife and I want to start on our investing careers. My wife has never bought a house and we thought it would be best to use an FHA loan under her name. We would of course live in the house for the required time of 1 year most likely longer. My question is after a year or two can we just go ahead and rent it out? Would we have to refinance to a conventional loan for this to happen? We were thinking it would be best to buy a house in a good neighborhood for a good price and fix it up and eventually rent it out. If we could pull money out of it to do another property on a conventional loan that would be great as well.
Any thoughts or comments to make sure we are at least on the right thought process and path would greatly be appreciated, thank you.
As long as you meet the terms of the loan you can use it for whatever. Simply though the FHA program allows you to rent it out after you have met your occupancy requirement of a year.
Why not buy a 2-4 unit property with FHA and rent out the other units while you live there. That is completely allowable.
I would like to share my experience.
I bought a house as my primary home using FHA loan. After living in that home for 8 years, purchased a bigger house in the adjacent town. I decided to rent my 1st home and got a tenant fast. Called insurance and changed policy. This triggered the bank to send me several letters threatening to call on loan if I do not get rid of tenant and move back to property or refinance. Scared, I called FHA asking if the bank can do this considering the fact that I met the occupancy requirement. FHA was useless and said I just need to continuously talk to bank. I just wanted for problem to end and decided to refinance using FHA streamline which was done quickly. Plus is with refinance, rate went down from 6.7% to 3.5%.
@Tanner Hargis You just need to meet the one year residency requirement then you can rent it out!
As @Maria Tan mentioned you can use a FHA streamline to refi but you CAN NOT take money out with a streamline. These are only for lowering your payment.
If I may suggest, look for a duplex or 3/4 plex. You will be able to use some of the rent to qualify and they will help pay down the note from the very start. Also, as many on here agree, generally your return is higher on multi unit properties.
May I ask why you are quick to jump to an FHA loan? Is the down payment a problem? There are lots of things that must be considered with FHA loans.
Thank you to everyone who has give there feedback. It is much appreciated. The down payment for us is a problem. We figured we could get an FHA loan because it only requires the 3.5%. A lot better than 10%. Although, I have read that Wells Fargo might have something different. We live in the Central Valley and although we could search for a multiplex it's just not a common thing out here. It's mostly houses and condos.
@Tanner Hargis I am in the process of purchasing a 4plex with an FHA loan and wanna do the same kind of deal, some kind of value add and then refinance... Major thing to keep in mind is that when you refinance traditional, the bank is going to only loan 75 to 80 percent LTV of the ARV so if youre going to put money into the property wth the expectation of being able to get cash out on the refi, youre going to need to create quite a bit of forced equity. Lets say you payed 100k with 3.5% down, the put 10k into it, and now the bank thinks its worth 130k, theyre going to only loan 104k on the new building (assuming 20% "down") which will pay off the original 96k loan leaving only 8 grand. Basically you got some money out and have a more valuable asset, but you left money in the deal. When I do mine Im hoping to be able to add in enough equity to cover my 20% and get my cash out, essentially leaving me in the deal for the original 3.5 %... Its a long shot, and Ill most likely have to leave SOME cash in the deal, but hey, dreamers dream.
That makes a lot of sense. I follow your thought logic. I hope it works out for you. Thank you for the information. Good to know these things and be able to reach a better decision about this.
You don't have to refinance but eventually you would want to get rid of the PMI so ounce you have enough equity I would refi just so you aren't paying that every month.
@Tanner Hargis PM me. There are low down non FHA programs where you can make the mortgage insurance monthly or pay an upfront fee. If you can qualify for a conventional and the DP is the only issue, there are ways to make it work so you don't have to refi to get rid of the insurance and you are not limited by the residency requirement. With FHA, keep in mind there is a large fee due upfront and then the monthly PMI.
We've done this several times. I bought my first home with a VA loan, lived there for a couple years till I got orders, and rented it out. My wife bought her first home with an FHA loan, refinanced to conventional with a big down payment she saved while living there, and rented it out.
Bottom line, the low down payment programs are a great way to get into REI if you're patient. Assuming your income grows over the years, and your properties cash-flowing, it grows quickly over time.
We analyze all our prospective purchases like rental investments now, even if we plan on living in them. That ensures they'll cash-flow when we move out.
@Brock Laramee it is generally between a half and one percent a year. There are many ways to work it depending on the amount of coverage you need.
Thanks to all for the help. Everyone of you has given me great value to actually go over and think of the best options. David I will reach out to you and go over what would be best. Thanks again everybody and hope this helps out other people in the future!