Why should you not go for FHA?

Question

Hello peeps!

I am new to RE investing and still in a learning curve, but I have this one thing that has been bothering me.

As my wife and I are also looking to buy our first home, I've been looking at different mortgage options.

The question is,

If FHA is so good, why isn't everyone doing it rather than conventional ones?

I know there are some requirements that need to be met, but what are the downside to FHA?

Any insights will be super appreciated!

Thanks y'all.

Jerry Padilla · Answer

@Koki Agata

Also the cost of the mortgage insurance. There is an upfront mortgage insurance as well as an annual mortgage insurance.

With 3-4 units the self sufficiency rule makes it difficult in higher cost areas or areas where the rents are low.

Jared Mann · Answer

@Koki Agata

I’m on the other side of the show me state in STL, I used an FHA loan to get into a B class duplex. While I am paying PMI, the rental income more than makes up for it, and it is not a property that I could have done 20% down, which is the great part of FHA. Now to get rid of the PMI, you will have to refi once you have some equity, but that lowers your mortgage, losing PMI and lowering P&I, increasing your cash flow and more importantly opens up your ability to use the FHA again. My goal is to repeat this process over the next 10 years and by the end of it I will have 20-40 doors achieved without any private financing. If you do not have the cash for 20%, I recommend the FHA all the way.

Koki Agata · Answer

@Walter Aaron Poling Thanks a lot for the info! I have noticed the existence of PMI on FHA, and I got the concept, but I was confused because even with PMI, the monthly mortgages for many properties seemed about the same as 30 year fixed or even lower on sites like realtor.com and zillow where they estimate the monthly expense for you. But if I understood you correctly, for conventional loans, more you pay off on the principle, less you'd eventually have to pay on your mortgage every month? My spouse is somewhat against FHA, so I was wondering how to have a conversation on FHA with her.

@Jerry Padilla Thanks for your insights as well! That is a great point. I didn't think of that. I live in KC Missouri, and housings are relatively cheaper and many people rent in the city. My wife and myself are also renting at this moment, and it costs over 1000 for one bedroom apartment, so perhaps it is a good idea to pursue FHA.

Thanks a bunch for all your insights!

Koki Agata · Answer

@Rick Albert It didn't come to me that you could also do conventional 3%! I will make sure to compare that and FHA when the time comes! Thanks for the insights.

@Jared Mann well hello state friend. Congrats on the Stanley Cup (a little late?)! What you are doing makes sense. I could afford 20% down, but then I realized I won't have enough reserve left for rehabs. So as long as cash flow covers all the extra expense that comes from FHA, I would love to look into what you are doing! That's a smart move on your part. Thanks for the inputs and your example!

Rick Albert · Answer

@Koki Agata,

I did the FHA 203k loan.  I noticed the fees are higher both at purchase and on the PMI.  Look into doing a conventional 3% down and compare the numbers to see if it makes sense.  I have had clients where each scenario was different.

Best of luck!

Rick

Koki Agata · Answer

@George Gabriel you are right, I guess as long as cash flow can justify the risk that comes from FHA, it is well worth it. And I am all with you for doing multi unit home with FHA and live in it while renting others out. It just makes sense, and helps you get ahead.

Haha, I am not sure if my wife would go for it, because we have been looking at our "forever" home for months now, and really hyped about having something that you can make your own! As much as multi unit with FHA makes sense, we might start with single family property. Though, who knows, we will see how things roll! I will keep you updated for sure.

Let me know how it goes for you in a few months! I am still in a saving/learning phase and won't expect to purchase one until perhaps mid next year!

Stephanie P. · Answer

@Koki Agata

Different loans do different things.  Usually, for the new investor or buyer, the barrier to entry for FHA is low enough for them to get their first home.  It's what FHA was designed for.  Because of their nature, the FHA loans are inherently risky (high loan to value, inexperienced borrowers, liberal income guidelines) and because they are riskier than say a regular conventional loan at 80% ltv, the mortgage insurance is higher (significantly higher) and doesn't go away like it used to.

On the other hand, for a first house that will accommodate up to 4 units, I say FHA is the way to go if the rents qualify.

George Gabriel · Answer

Hi Koki, this is a great question and I myself am considering going this route as well. Are you looking at a traditional home or trying to leverage the FHA for a duplex / triplex?

I'm wondering if finding a duplex or triplex in your area would be where the FHA would be most advantageous and perhaps offset the extra "hit," from having to pay PMI for the life of the loan?

Aaron Poling · Answer

You pay PMI on FHA loans for the life of the loan. With conventional it should drop off after you reach 20 to 22 percent equity paid down. You can also only get one fha loan at a time, unless the second is a second home a certain amount of miles from your primary residence. You can't get fha loans for investment properties unless you are living in them. I would suggest speaking to a loan officer as there are probably other differences to chose one over another.

I do think FHA is an excellent chose to purchase a four unit where you live in one of the units. This is great to get you started.

Thanks Aaron

Victor S. · Answer

"MIP is the PMI of FHA loans. It is paid as an upfront cost and as an annual premium. The current upfront MIP is 1.75 percent of the loan amount. It is required to be paid "upfront," or at the time of closing."

Here's one good reason above. You're basically putting down 5.25% + having the irrevocable pmi for life of this loan. Might as well go conventional at 5% down.

Why should you not go for FHA?

Most Popular Reply