First multi-family: to go FHA or conventional?

Question

Hi everyone,

I'd welcome advice/input on this situation, if anyone is willing. My wife and I are in the process of finalizing an agreement for a 3-family home (our first) in upstate NY (Rochester area). Based on conversations with a couple lenders and a mortgage broker so far, we haven't been pulled strongly toward either an FHA or Conventional Mortgage. We have the money to put 20-25% down on the property, but that would be $80-100K and would chew up a good chunk of our investable cash. Because it's our first foray into ownership (and being landlords), I want us to have a cash cushion of some kind if we run into unforeseen expenses early on. More than that, I'd like to use some leverage when possible, leaving additional capital for other potential investments down the line.

Because we will be relocating from out of state, our pre-approval was based on it being a 25% down Investment Property (i.e. NOT owner occupied), but our intention is very much to owner-occupy. The Investment loan would carry a 5.5% interest rate, at least a full percent higher than if we went conventional or FHA with it as our primary residence. A Mortgage Broker has told us he could get us a rate under 4% on an FHA Loan with 10% down.

Currently working on securing NY jobs and/or an agreement from my employer that I can work remotely. Setting that aside, do people feel like there's a clear winner between the two: (1) FHA with 5-10% down, leaving us more free cash but a higher monthly pmt; or (2) putting 20-25% down with a conventional (or Investment) which would lower our monthly payment and avoid PMI, but tie up a lot more cash up front?

Appreciate the feedback as we begin/continue along with this process.

Bob Okenwa · Answer

With an FHA loan and 10% down, you can have the MIP removed after 11 years, whereas a conventional loan's PMI can be removed once you have 20% equity from the original loan amount in the property and has to be removed by the lender once you have 22% of the loan paid down.

For the lender's requiring 25% down, keep looking. You can get a conventional loan for as little as 3% down, but the requirements vary by lender and typically come with a higher interest rate.

The biggest things to consider between the two loans are MIP and UFMIP on the FHA loan vs the PMI of the conventional loan should you not do 20% down. UFMIP is 1.75% of the loan amount and can either be paid upfront or rolled into the loan.

Run the numbers both ways to see what makes the most sense for you and your wife.

Jaysen Medhurst · Answer

@Evan St. George, sure consider a $100k property financed 2 different ways, Conventional (4.25%, 20% down) vs. FHA (4.25%, 3.5% down, 1.75% UFMIP, 0.85% MIP)

Conventional:

• $20k down
• $80k debt
• $394/month payment

FHA:

• $3500 down
• $98,250 debt (UFMIP rolled into loan amount)
• $553/month payment (P-I-PMI)

That means conventional costs $158/month less, but you have $16,500 more out of pocket. It will take a little more than 104 months (<9 years) to recover your additional down payment from the lower mortgage payments. That's the payback period. Interestingly, it takes almost the same amount of time to get the FHA loan paid down to 80% of LTC. At that point you'll have 65% LTC from the conventional loan.

Vanessa Cosenza · Answer

I’m a realtor in NE FL coast (st. Augustine / Jacksonville and the  beaches) in my expertises conventional is the ya to go as it removes MIP and FHA loans are more difficult and takes longer to process.

A good lender would let you know the pitfalls but in the past 6 yrs I’ve had more issues with FHA loans falling through and having to go Conventional anyway.

Have fun in NY and good luck with your investments!

Jerry Padilla · Answer

@Evan St. George

When my wife and I purchased our first home together we went with an FHA initially. We fixed it up and forced some equity in the property and then refinanced with a conventional mortgage to avoid mortgage interest.

The market here is kind of crazy right now! Properties are getting several offers the day they go on the market, when priced at market.

There aren't a ton of MFR on the market. Where are you thinking of purchasing?

Michael Noto · Answer

@Evan St. George Something else to consider as an alternative to FHA is a lower money down conventional owner occupant loan. A lot more doors open up financing wise when you are owner occupying. There is a regional bank here in CT for instance that has a 3% conventional loan for owner occupants.

The only stipulations to get the loan is that you live in it for a year and that it is the first house you have ever purchased.

Dennis Callaghan · Answer

I live here in Rochester and I used Fairport Savings and Loans, who last I knew still had 15% down on a rental property so it will leave you some money left and give you a lower montly cost and cheap PMI. Personally if the other two apartments covered almost all costs of the entire property and you can have housing for almost no cost, I would save my money and wait till you get local and find another investment property because having 60k or more cash in this market could be 20% easily on a property you dont live in. I would go FHA when you can.

David Gonzalez · Answer

If you have the credit score you can get a low down payment conventional loan. You will have to pay PMI (Private Mortgage Insurance) but it will disappear once you meet the minimum equity and time requirements. Some loan products offer you the opportunity to pay the PMI up front. FHA is great for people who neither have the down payment or the credit score.

Dennis Callaghan · Answer

@Evan St. George I see your concern with changing the mortgage type but if your realtor can explain why your making change properly to the seller then it may not be an issue, and if they think it is then continue with the conventional if you dont want to lose. Good luck.

Evan St. George · Answer

This is all great info - thank you everyone! @Dennis Callaghan I will give Fairport Savings & Loan a call tomorrow to see what they might be able to offer. Many thanks for that recommendation.

One issue is that our pre-approval (and contract) was based  on a conventional mortgage, and now our realtor is suggesting that to try and switch to an FHA might give the seller pause, or even potentially cause the deal to fall apart. Is this a real concern? I fully understand that from a realtor's perspective, any potential hiccups are not ideal at this point. But, I would think that the seller is happy to get the property sold, regardless of what our mortgage looks like. And if we could get an FHA at <4% with less money down, that is appealing. Though certainly don't want to lose the deal over it.

FWIW, we have no major debt and 800+ credit scores. With existing rents, I expect we can bring in about $1,500-1,600 gross monthly rent from the other two units that we would rent out.

Evan St. George · Answer

@Jaysen Medhurst, @Bob Okenwa Thank you both for the quick feedback, and the additional suggestions. Jaysen - what did you mean by "the pay-back period to recover your down payment money with the conventional loan." Just want to make sure I understand what you're referencing.

First multi-family: to go FHA or conventional?

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