FHA loan Downpayment for Duplex in Dallas - first time

12 Replies

Hello yall,

I'm moving with my girlfriend and her son to Dallas (where I'm from) from Long Island, NY mid-October. I want to buy a duplex as an investment using an FHA first time homebuyer loan. My plan is to rent out the other half, live there for a year or two, and move on to the next property. I've been working for landlords and as a real estate agent in Brooklyn for a few years so I know how to manage important aspects of the process, but some of it is new to me (I'm 26).

I have no cash. I want to use an FHA loan because it seems like the best option, especially with the idea of a 3% downpayment. I have credit in the mid 700s. My question is: for an owner-occupied loan, is the downpayment really just 3%? I've heard that I have to make a downpayment of 15-20% to avoid getting mortgage insurance. Can anyone provide some expertise on this? With my credit, can I really just use 3-3.5% down to buy a duplex I will use as an owner-occupied investment, or do I need to come up with 15-20%

Thanks and looking forward to hearing back.

- Tyler 

@Tyler Austin , I’m always happy to help another Tyler!  What’s bringing you to Dallas?

A couple of considerations:

- FHA is not just for first time homebuyers. Minimum down payment is 3.5%

- Conv has some low down payment options as well, and with good credit it may be a better option than FHA

- Specifically a 5% down HomePossible is a great Conv for Multifamily 2-4 unit primary residences (3% down for single family)

- You mention having no cash, you definitely will need some cash for down payment, closing costs, and personally for reserves. You can get gift funds from a family member to help you qualify 

- I always recommend using a low down payment option for any owner occupied purchase. The opportunity cost of capital for 20% significantly outweighs the cost of the mortgage insurance required on lesser down payment loan options. Plus you can refi later if your home appreciates to get rid of the mortgage insurance. 

Let’s grab a coffee or lunch when you make it to DFW! 

@Tyler Austin my first duplex was an owner occupied duplex purchased with an FHA loan.

It's a great way to get started and I recommend it to anyone looking to get started! The down payment really is 3.5% and it will have PMI but it doesn't matter if the tenants are paying the bill.

Originally posted by @Jordan Moorhead :

@Tyler Austin my first duplex was an owner occupied duplex purchased with an FHA loan.

It's a great way to get started and I recommend it to anyone looking to get started! The down payment really is 3.5% and it will have PMI but it doesn't matter if the tenants are paying the bill.

Thanks for getting back to me. So you mean you figure the PMI into the tenant half of the duplex?

Once moved out and refinanced, what happens to the PMI?

Originally posted by @Tyler Hodgson :

@Tyler Austin, I’m always happy to help another Tyler!  What’s bringing you to Dallas?

A couple of considerations:

- FHA is not just for first time homebuyers. Minimum down payment is 3.5%

- Conv has some low down payment options as well, and with good credit it may be a better option than FHA

- Specifically a 5% down HomePossible is a great Conv for Multifamily 2-4 unit primary residences (3% down for single family)

- You mention having no cash, you definitely will need some cash for down payment, closing costs, and personally for reserves. You can get gift funds from a family member to help you qualify 

- I always recommend using a low down payment option for any owner occupied purchase. The opportunity cost of capital for 20% significantly outweighs the cost of the mortgage insurance required on lesser down payment loan options. Plus you can refi later if your home appreciates to get rid of the mortgage insurance. 

Let’s grab a coffee or lunch when you make it to DFW! 

Thanks for getting back, and responded to your message! Why would a conventional loan make better sense than an FHA? How does the PMI get lost if the home is refinanced?

@Tyler Austin the tenant rent is what it is. It's not like one person pays or doesn't. They pay their rent, then you take rent money and apply it to all of your expenses, mortgage included  and pay the difference!

The conventional loan can make more sense for the first property because HomePossible requires you to be a first time homebuyer. And with good credit the PMI will be less than an FHA loan. Then with your second property you can use the FHA loan. Now you have two multi-family properties with 8.5% cash invested (5% and 3.5%). 

Refinance gives you a brand new loan and pays off the old one. Once you have 20% equity you can get a new loan with no PMI and payoff the old loan with PMI

Originally posted by @Tyler Austin :
Originally posted by @Tyler Hodgson:

@Tyler Austin, I’m always happy to help another Tyler!  What’s bringing you to Dallas?

A couple of considerations:

- FHA is not just for first time homebuyers. Minimum down payment is 3.5%

- Conv has some low down payment options as well, and with good credit it may be a better option than FHA

- Specifically a 5% down HomePossible is a great Conv for Multifamily 2-4 unit primary residences (3% down for single family)

- You mention having no cash, you definitely will need some cash for down payment, closing costs, and personally for reserves. You can get gift funds from a family member to help you qualify 

- I always recommend using a low down payment option for any owner occupied purchase. The opportunity cost of capital for 20% significantly outweighs the cost of the mortgage insurance required on lesser down payment loan options. Plus you can refi later if your home appreciates to get rid of the mortgage insurance. 

Let’s grab a coffee or lunch when you make it to DFW! 

Thanks for getting back, and responded to your message! Why would a conventional loan make better sense than an FHA? How does the PMI get lost if the home is refinanced?

To add to what was already said, you will be paying MIP (it's FHA's version of PMI) with less than 20% down. Read this part carefully....MIP never goes away with FHA loan. Not when you're at 20% equity, never. On a conventional loan (at least 5% down) you can possibly lose the PMI by getting an appraisal when you have 20% equity. In order to get rid of MIP, you will have to refinance into a conventional loan at some point in time. I bought my duplex with FHA (3.5% down @ 3.75% interest). With my great interest rate, it was absolutely worth it. I could have put more down, but I held back more down payment in order to do the next deal quicker. Also, if you want to move out of your duplex in the future, and you refinance into a conventional loan, that frees up your FHA loan to use all over again on a live in residence.

Also, many say house hacking is great to "live for free". I did not live for free. However, the tenants did pay about 65% of my PITI & MIP, and that was about $500 cheaper out of pocket per month than I was paying in rent. So, even if you still have out of pocket expenses on mortgage, house hacking is still a fantastic way to get started in real estate investments.

Originally posted by @Anthony Wick :

To add to what was already said, you will be paying MIP (it's FHA's version of PMI) with less than 20% down. Read this part carefully....MIP never goes away with FHA loan. Not when you're at 20% equity, never. On a conventional loan (at least 5% down) you can possibly lose the PMI by getting an appraisal when you have 20% equity. In order to get rid of MIP, you will have to refinance into a conventional loan at some point in time. I bought my duplex with FHA (3.5% down @ 3.75% interest). With my great interest rate, it was absolutely worth it. I could have put more down, but I held back more down payment in order to do the next deal quicker. Also, if you want to move out of your duplex in the future, and you refinance into a conventional loan, that frees up your FHA loan to use all over again on a live in residence.

Also, many say house hacking is great to "live for free". I did not live for free. However, the tenants did pay about 65% of my PITI & MIP, and that was about $500 cheaper out of pocket per month than I was paying in rent. So, even if you still have out of pocket expenses on mortgage, house hacking is still a fantastic way to get started in real estate investments.

 Awesome response. Thanks Anthony

Originally posted by @Anthony Wick :

To add to what was already said, you will be paying MIP (it's FHA's version of PMI) with less than 20% down. Read this part carefully....MIP never goes away with FHA loan. Not when you're at 20% equity, never. On a conventional loan (at least 5% down) you can possibly lose the PMI by getting an appraisal when you have 20% equity. In order to get rid of MIP, you will have to refinance into a conventional loan at some point in time. I bought my duplex with FHA (3.5% down @ 3.75% interest). With my great interest rate, it was absolutely worth it. I could have put more down, but I held back more down payment in order to do the next deal quicker. Also, if you want to move out of your duplex in the future, and you refinance into a conventional loan, that frees up your FHA loan to use all over again on a live in residence.

Also, many say house hacking is great to "live for free". I did not live for free. However, the tenants did pay about 65% of my PITI & MIP, and that was about $500 cheaper out of pocket per month than I was paying in rent. So, even if you still have out of pocket expenses on mortgage, house hacking is still a fantastic way to get started in real estate investments.

 Do you mind if I ask specific numbers from your experience? How long did you live in/own the duplex before refinancing into a conventional loan? Feel free to message me directly. 

@Tyler Austin I still have my FHA loan, even though it is rented out. There's a requirement with FHA that you must "intend to live in the house for 12 months". If you live there less than 12 months I believe the loan "could" be called in. My loan was at 3.75% for 30 years. At today's current interest rates, it will not pay for me to refinance. PITI would be higher than with my current MIP. But generally speaking, every area is different as to how long it will take you to get 20% equity, not to mention every deal. If you fix a place up, you're obviously more likely to gain equity quicker. And while I've heard most banks require at least 1 year of seasoning, I've also seen local banks refinancing in as little as 6 months. It pays to shop around when you believe you're close to that 20% equity mark. Run the numbers.

Originally posted by @Anthony Wick :

@Tyler Austin I still have my FHA loan, even though it is rented out. There's a requirement with FHA that you must "intend to live in the house for 12 months". If you live there less than 12 months I believe the loan "could" be called in. My loan was at 3.75% for 30 years. At today's current interest rates, it will not pay for me to refinance. PITI would be higher than with my current MIP. But generally speaking, every area is different as to how long it will take you to get 20% equity, not to mention every deal. If you fix a place up, you're obviously more likely to gain equity quicker. And while I've heard most banks require at least 1 year of seasoning, I've also seen local banks refinancing in as little as 6 months. It pays to shop around when you believe you're close to that 20% equity mark. Run the numbers.

 Thanks for your advice