Using FHA Loan to purchase Duplex - Put down more than 3 1/2%?

Question

Hello BP Community,

We are planning on purchasing a duplex to live in one of the units and rent out the other. I mentioned using a FHA loan and only putting down 3 1/2% so we could use the rest of the money we have saved to go towards purchasing another rental property. However, we've been going back and forth about whether we should put more than 3 1/2% down to lower the monthly payments and interest.

What are your thoughts? Is it a poor strategy to only put 3 1/2% down?

Chris Mason · Answer

3.5% down 2-4 unit FHA, gets you in the door. With life-of-loan mortgage insurance, as mentioned.

10% down 2-4 unit FHA, you get mortgage insurance that drops off after 11 years, and that is a tad bit cheaper in the meantime.

20%, boom now you're going conventional and no mortgage insurance.

In any/all cases above, you would/could look at refinancing down the road if it makes sense. For example if the property appreciates and you have >20% equity, you could knock off the mortgage insurance with a refi, where the equity can serve in lieu of a down payment.

Almost no one goes above any of the milestones without going all the way to the next one, (f. ex 9% down or 18% down... go all the way to 10% or 20%, or stick to the lower tier) since the benefit is so marginal, relative to staying liquid.

Tim Herman · Answer

@Kelsy White Like @Anthony Ward you have to run the numbers through a calculator or spreadsheet. Both on BP. Calculator can use 5 times or upgrade to pro for unlimited use and spreadsheet in the files section. Let's say you cash flow $200 per month on 20% down on a $100000 property.  $2400 cash flow/$20000 down = 12% cash on cash. Mortgage insurance is between .5 and 1%. At .5% on $96500 = $482 or $40 per month. There is a difference of $79 between the mortgages. $200 - $79 - $40 = $81 per month cash flow*12= $972 /$3500 down payment= 28% cash on cash return.  At 1% it is $200 - $79 -$80 = $41 *12= $492/$3500= 14% cash on cash. This is simplified as I am ignoring closing costs, but until you run the numbers you can't tell. It will take you 6 years to get enough for another 20% down. Rule of 72. Divide 72 by the interest rate, 72/12=6 years.

Anthony W. · Answer

@Kelsy White you have a pretty good strategy going for yourself and welcome to the investing world. If you want to put more down then i would look at using a different type of debt service. No matter what you will have to pay mortgage insurance on any debt you take out where you put down less than 20%. With the FHA loan it is great that you only have to put 3.5%- 4% down but what you also have to factor in is the MIP (mortgage insurance premium) this sticks with the loan for the life of the loan. For example you have a $600 mortgage payment then you need to add $100-200 on for the MIP. Im not saying to not use this but i would possible try to go another route like maybe conventional if you can do it. Hope that helps a little bit.

Daniel Brown · Answer

@Kelsy White Numbers cancel out fear. Run your numbers. Make sure you know all your fixed costs will be. Then, if it’s still cash flowing you should be good to go. Shoot me a pm. I can run those numbers for ya on the calculator to give ya a better idea what you’re looking at.

Kelsy White · Answer

@Ronald Russell Thank you for the helpful thread!

Ronald Russell · Answer

@Kelsy White I have read that once your LTV reaches 80% you can request the PMI be dropped. The lender is legally required to drop it at 78% LTV. I’m new to this so y’all seasoned investors correct me if I’m wrong. Being it’s FHA the MIP can’t be dropped in the early stages of the loan with a LTV of 90% or more. Here is a thread that can explain way better than I can and give you options like refinancing once you have 80% LTV to drop MIP.

https://www.biggerpockets.com/forums/50/topics/110918-removing-pmi#p713558

Kelsy White · Answer

@Tim Herman thank you for breaking down the calculations! I see what you're saying about not being able to tell until you run the actual numbers, I will keep that in mind.@Chris Mason Interesting, thank you for breaking that down as well! I didn't know you could refinance to knock off the mortgage insurance. Learning something new everyday, thank you!

Kelsy White · Answer

@Anthony Ward  I was not aware of the MIP, so I'm glad I asked! I've heard a few real estate investors mention using the FHA loan to start out, but I don't recall them mentioning MIP. I'll need to factor that in and maybe rethink my plan a little bit - thanks for your help!

Using FHA Loan to purchase Duplex - Put down more than 3 1/2%?

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