Currently looking at my first investment property. Looking to do a live in flip/ house hack. Numbers are all checking out on the property. Im just in the process of comparing the advantages and disadvantages of an FHA vs 30yr fixed mortgage. I know FHA has a much lower downpayment than a typical loan but that comes with some guidelines.
Where could I find out more about these?
I know so far is that 1) you need to live in the home for at least 1 year and 2) all the work must be done by a licensed contractor.
Any specific forums on this or anywhere I could learn up fast?
FHA is good due to the low down payment but the up front MI is very expensive.... in addition, you have to add .8 to your rate which is going to be your monthly MI so it will eat into your monthly profits; you cannot drop the MI, you would have to refinance to get rid of it. make sure you properly calculate the payment with all escrows and re-run you numbers... FHA wqould be a good option if you need the additional DP money a conventional loan would require to perform rehab.
Hope that helps... -Ross
@Ross Y. definitely did help to clarify some things. Thank you for the input
@Jimmy Ready you do not need to have a licensed contractor do your work with FHA. If you use the 203k loan you do.
If you get a conventional loan with low downpayment they will also typically require you to live in the home for 1 year unless you get a 20% down non-occupant loan.
If you break out an FHA vs. a conventional owner-occupied loan they amount to close to the same thing. FHA has slightly lower down payment, but you are forced to refinance if you ever want to get rid of MIP so you end up making that payment one way or another.
Ask your lender what are all the differences in the products. They should be able to tell you and explain what that means for your scenario (assuming you found a lender that has dealt with investors).
@Jimmy Ready From a financial perspective, the biggest impediment is that you will always have to pay MI. Unlike conventional loans, where the MI drops off once you are at 20% equity, FHA loans will always have you paying MI.
If you're thinking of re-fi'g, that will just add to costs (and eat into your profits). If you can do 4-5% down payment and have a decent credit score, most local lenders (mortgage brokers, credit unions, local banks) will be able to offer you a way better (overall) deal than an FHA loan.
@Bryan O. im in the market for a lender. How do you know if they deal with investors or not? Im assuming a bank would not be a good place to go to have them explain the advantages/disadvantages of these loans when it comes to investing
@Omar Khan ok I think I understand... so FHA always pay mortgage insurance premium unless you refinance. Conventional loans where you put less than 20% down you pay PMI until you reach 20% and then it drops off automatically? Just want to double check
@Jimmy Ready Correct - FHA is always mortgage insurance, with conventional loans the mortgage insurance goes away once you hit 80% LTV.
@Jimmy Ready finding a lender that understands investing mindset is like finding a RE agent that knows investing. Look for referrals and screen the lenders to see if they understanding what you are after.
This is a great thread. FHA is attractive because of the low down payment but PMI will kill your profit for a year before you can refinance so I am gearing towards conventional loans for my first deal. I'm not going to big banks as well but local credits unions.
@Omar Khan thank you for clearing that up! Let me play devil's advocate... Now why in that case would anyone do an FHA over a conventional with 5% down? Doesn't really make too much sense to me being that once you hit 20% with a conventional loan you get rid of PMI which would eat into some profits long tern
@Bryan O. any common questions you typically ask when screening lenders? Anyhting to stay away from?
@Harris Dy why credit unions over big banks?
Credit Unions usually have far better rates especially if you are just starting out with not much capital or if the loan you are looking at is small amount. Big banks have high minimum loan amount... example they won't approve a $15k loan because their minimum is $100k... something like that. It would be to your advantage to compare rates and terms.
@Jimmy Ready Same reason people do things different than you or I would do. Some people have shoddy credit, some people only focus on the 3.5% down payment (as opposed to the 3-5% down payment for conventional available right now), some people simply don't know and think FHA is the only way to go, some people do not have access to conventional financing for various reasons.
@Harris Dy just starting out would definitely apply in this case haha Would credit unions also be able to offer larger amounts? I'm looking to put 10% down on a $140,000 so i would have to mortgage $126000
@Omar Khan i understand. So given my situation... great credit, stable job, good source of income best bet would be conventional. Thank you for clearing this up. I automatically thought that FHA was the only way to go when putting down less than 20% down payment.
@Jimmy Ready FHA is one of many options. You seem like you're doing better than the average person, so why get the same product that an average person would get?
It's best to go around and check what's available in your market. I would also suggest checking out lenders in neighboring markets (to be honest, many lenders nationwide, so a Dallas based lender should be able to lend in your local market) as well.
@Omar Khan definitely will be comparing various lenders in the near future. Thank you
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