Rental Property Investor · Oakland, CA · Member since 2016 · 602 posts · 250 votes
I am a first time home buyer and was wondering what is the pro and cons of using a FHA loan vs a standard mortgage for my first home purchase. Any thoughts and feedback would be greatly appreciated.
And does anyone have any suggestions for a FHA Loan in the Austin, TX area?
Los Angeles, CA · Member since 2016 · 97 posts · 49 votes
9y
Bryan Pham Congrats at looking at your first home purchase! A big thing for you to consider is whether this will be an investment property for you or not. With an FHA, you will have to occupy the property as your primary residence for at least one year. Therefore, with an FHA, you limit your options as far as renting immediately, etc. You could always try to refinance from FHA to conventional once you get enough equity (20-25%) in the home. The lower down payment with the FHA does make it very attractive though!
Best of luck Bryan!
Los Angeles, CA · Member since 2016 · 97 posts · 49 votes
9y
Bryan Pham Congrats at looking at your first home purchase! A big thing for you to consider is whether this will be an investment property for you or not. With an FHA, you will have to occupy the property as your primary residence for at least one year. Therefore, with an FHA, you limit your options as far as renting immediately, etc. You could always try to refinance from FHA to conventional once you get enough equity (20-25%) in the home. The lower down payment with the FHA does make it very attractive though!
Best of luck Bryan!
Rental Property Investor · Oakland, CA · Member since 2016 · 602 posts · 250 votes
9y
@Brent Coombs Hi Brent, thank you for taking the time to answer my post you definitely put a smile on my face. 3.5% sounds magically but I am concern with the fact that this might be too good to be true. I am unfamiliar with the "risks" involved with FHA loans. Could you name the top 3 cons off the top of your head?
Rental Property Investor · Oakland, CA · Member since 2016 · 602 posts · 250 votes
9y
@Account Closed That is a very good point. I do plan to live at the property at least one year and attempt a house hack to supplement my income. Do you know if I would have to wait a full year to refinance the house or is it whenever I hit the 20-25% that I could refinance at anytime?
Los Angeles, CA · Member since 2016 · 97 posts · 49 votes
9y
Bryan Pham I'm fairly certain that you could refinance as soon as you get to the 20-25% range. Additionally, you'd still have to qualify for the new mortgage that your refinancing to. And if your trying to house hack, it may be difficult to get 20-25% into the first home while house hacking a second home (especially if you have to use a conventional down payment of 20% on the second home). Then your kind of starting to go against the whole reason you used an FHA in the first place (less cash out of pocket up front).
Rental Property Investor · Oakland, CA · Member since 2016 · 602 posts · 250 votes
9y
@Account Closed Hi Marshall, please excuse my lack of knowledge. Let's say for example I purchase my first home with a FHA loan (3.5% down payment), house hack ideally to have my future tenants pay for parts if not all of my mortgage and after I hit the 20-25% mark, refinance the first home to pull out 70% of the ARV. Let's say if this time I purchase a 2nd home that price's range is within the 70% of my first home's ARV instead of doing a conventional 20% down and pay that house off in full. Then use the income from my 2nd home to supplement my income to keep my debt to income ratio at 43%. Purchase a 3rd home with a conventional 20% down. What do you think of this strategy?
Rental Property Investor · Oakland, CA · Member since 2016 · 602 posts · 250 votes
9y
@Account Closed Thank you Hubert for the response. While on a FHA loan, I am not approved to do an appraisal on the property until I hit the 20-25% mark, is that correct?
@Brent Coombs Hi Brent, thank you for taking the time to answer my post you definitely put a smile on my face. 3.5% sounds magically but I am concern with the fact that this might be too good to be true. I am unfamiliar with the "risks" involved with FHA loans. Could you name the top 3 cons off the top of your head?
Off the top of my head: 1. It generally takes longer to get approved, which has the knock-on effect of making it harder to get the BARGAIN that you're also looking for (because "desperate" Sellers want quick-cash-buyers). 2. I'm not sure that the Interest Rate will be the Lowest around. Regardless, you'll be paying a 0.85%* premium to pay for a mandatory Mortgage Insurance (PMI). 3. Being leveraged at 96.5% gives you NO safety margin if the economy goes against you, and your loan gets called in (unless you HAVE found that elusive bargain to begin with). 4. Such a high leverage also makes it that much harder to positively cash flow, even after it's fully rented!
Other than that, it's the best thing to come along since sliced bread! Ha! All the best...
* Did Hubert say that PMI is 1.25% on top? Is that State specific? I thought: 0.85%! Check!
Rental Property Investor · Oakland, CA · Member since 2016 · 602 posts · 250 votes
9y
@Brent Coombs Once again, thank you for answering my question. I am most concerned with your point 3, after being leverage for 96.5% and potentially have the economy go against me. Why do people decide on the FHA Loans when it's so risky? Is there a perhaps a strategy that I can leverage going forward? Please name the book and I will study it like a madman.
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
9y
Originally posted by @Account Closed:
Bryan Pham I'm fairly certain that you could refinance as soon as you get to the 20-25% range. Additionally, you'd still have to qualify for the new mortgage that your refinancing to. And if your trying to house hack, it may be difficult to get 20-25% into the first home while house hacking a second home (especially if you have to use a conventional down payment of 20% on the second home). Then your kind of starting to go against the whole reason you used an FHA in the first place (less cash out of pocket up front).
That's not quite correct. He'd be re-financing the FIRST property once it appraises at more than 20% equity, but then, he'd re-apply for a NEW FHA-approval for his second, at just 3.5% down!
@Brent Coombs Once again, thank you for answering my question. I am most concerned with your point 3, after being leverage for 96.5% and potentially have the economy go against me. Why do people decide on the FHA Loans when it's so risky? Is there a perhaps a strategy that I can leverage going forward? Please name the book and I will study it like a madman.
Bigger Pockets puts out lots of Books, eBooks, Webinars, Blogs and Forum Threads. "The ultimate Beginners Guide" comes to mind, though I haven't read it myself (yet?).
The basic premise I come back to is that you should look for your primary AS IF you were buying it purely as an investment. Ask: why is this a great INVESTMENT to buy, even in this economy?
How can you value-add to it over time? Is it ALREADY worth a lot more than you could get it for? Is it able to generate income even while you're living there? (eg. It can be up to a 4-plex!) Cheers...
@Brent Coombs Once again, thank you for answering my question. I am most concerned with your point 3, after being leverage for 96.5% and potentially have the economy go against me. Why do people decide on the FHA Loans when it's so risky? Is there a perhaps a strategy that I can leverage going forward? Please name the book and I will study it like a madman.
I have to say that I disagree with @brent coombs about point three; it's actually just the opposite. With so little money down, the bank is taking on the additional risk, not you, which is why you have to pay for PMI on FHA loans. I'll give you a simple illustration:
Let's say you could somehow find a $100,000 house in Austin, and you chose to use a 3.5% loan. You'd have only invested $3,500 (I'm ignoring closing costs because they'd be similar in both scenarios) of your money, with the bank assuming the rest of the $96,500 of risk. If the market collapses tomorrow and that house becomes worth $50k, you can walk away with very little cost to you (besides the credit ding, but that's beyond the scope of your question). If you do a conventional at 20% to avoid PMI, you've risked $20,000 before closing costs, which is also money that you can't invest elsewhere, or if you're really conservative, hold in reserve in case you run into trouble.
Full disclosure, I always pay 20% on my "house hacks" because I hate PMI, but I'm painfully aware that I'm leaving money on the table by not leveraging to the fullest extent possible during this time of historically low rates.
Real Estate Agent · Highland, UT · Member since 2015 · 407 posts · 272 votes
9y
@Bryan Pham You've gotten some great answers so far. I wanted to add a few.
1. The home or property also has to qualify for a FHA loan so depending how distressed you want to go it might not be a viable option. The things that get hit most is peeling paint, roof life (needs at least 3 years), and in Utah (not sure elsewear) needing seismic straps for water heaters. I almost never see them in homes that haven't sold in the last 5 years.
2. Mortgage insurance, you could do a conventional backed loan with 3% down or 5% down and prepay your mortgage insurance making monthly payments less. However that has some pros and cons to it. If you get a property that you can add value to then it might make sense to pay the monthly mortgage insurance until the renovation is done and you have a new appraisal done.
@Bryan Pham You've gotten some great answers so far. I wanted to add a few.
1. The home or property also has to qualify for a FHA loan so depending how distressed you want to go it might not be a viable option. The things that get hit most is peeling paint, roof life (needs at least 3 years), and in Utah (not sure elsewear) needing seismic straps for water heaters. I almost never see them in homes that haven't sold in the last 5 years.
2. Mortgage insurance, you could do a conventional backed loan with 3% down or 5% down and prepay your mortgage insurance making monthly payments less. However that has some pros and cons to it. If you get a property that you can add value to then it might make sense to pay the monthly mortgage insurance until the renovation is done and you have a new appraisal done.
Great tip on #1 @Bryan Pham. Always knew that some FHA's don't qualify but was curious to what were most of the root causes.