Newbie needs help understanding finance options on a real-life scenario

Buying & Selling Real Estate
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Newbie needs help understanding finance options on a real-life scenario

George B.
New York City, NY · Member since 2013 · 14 posts · 1 vote

Hello all,

My name is George. I'm a young guy who has discovered a passion for real estate, I've been reading the forums and articles for a while, I LOVE this site, and I'm finally ready to begin investing! :D But I need your help.

There are two, 2-family properties I am interested in purchasing right now. Let's call them Property A and Property B:

Property A

  • Short Sale
  • List price: 165,000
  • My intended offer: 110,000
  • Very minor work required (mainly cleaning and painting)

Property B

  • Not a short sale
  • List price: 148,000
  • My intended offer: 140,000 (seller is not very negotiable)
  • No work required

Both properties will cash flow, pass the 50% rule, etc. Originally, before I educated myself, I thought, "oh, I'll just buy Property B as an FHA property with 3% down and put in an offer on Property A...and since short sales usually take much longer to close, I will have at least 5% to close on Property A as a conventional 5% property in the event that the bank accepts my offer" :) HA! -- Now that I am educated, I realize I need at least 20% down to buy Property A.

Unless I hit the lotto, there is virtually no chance I could have ~$22,000 in a few months to buy Property A.

My questions for you all are:

  1. Can I buy both of these properties?
  2. If so, is there another way for me, a rookie, to buy Property A with much less than 20% or, dare I say, NO money down?
  3. Do you have any other creative suggestions for me?

Thanks in advance and sorry for the long post!

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Simon Campbell
Miami, FL · Member since 2012 · 612 posts · 189 votes
12y

Regarding the short sale property: In my experience, lenders are only looking at around a 5 - 10% market price discount on a short sale making your lowest offer price around $148,500. If that cannot cash flow for you, then I would suggest moving on.

As mentioned before, FHA loans carry a higher APR, permanent MI which is at a higher rate than most lenders PLUS an upfront mortgage fee of 1.75% which can be wrapped into the loan. This makes this type of mortgage much more expensive than other loan packages.

My suggestion is to get yourself into a bank and make sure that you can qualify for a loan. Then have your loan officer break down the pros and cons of their different loan options. Also, talk to them about grants and assistance for first home buyers.

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    13y

    FHA is 3.5% down now and hasn't been 3% in awhile. The mortgage insurance stays with the FHA loan now forever and you can't get rid of it. The insurance is substantial and can add hundreds of dollars a month to your total payment.

    For this reason many like conventional but they are more picky on credit scores and want more down. There are lenders for conventional that are less down as a primary residence than the 20%.

    The difference being if you are going to live on one of the 2 units and rent out the other or buy for investment only and live elsewhere. FHA is for your primary residence. Sometimes investors get these things mixed up. Define first if you are going to live there and then look for the loan options. Even with down payment you will need to qualify credit score wise, be able to pay upfront reserves, and meet AGI requirements.

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  • George B.
    OP
    New York City, NY · Member since 2013 · 14 posts · 1 vote
    13y

    Hi Joel,

    Thank you for your helpful response. And thanks for the correction on FHA.

    Forgive me if I'm reading too far into your post, but are you suggesting that, if I qualify, I may be able to purchase Property B on a less-than-20% mortgage and then buy Property A on an FHA mortgage if I prefer?

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    13y

    I can't give legal advice.

    Property A you have no way of knowing if the short sale offer will be accepted or not and how long that will take. The debt markets rising in interest rate could severely affect the payment if you had to wait a long period of time to get acceptance and close.

    Cleaning and painting is considered cosmetic in nature and not really a repair or loan concern unless you are talking mold issues or lead based paint etc.

    Whether you can buy one property or two will depend on your income and job history and assets. You can't claim both as a primary residence. One would be primary and another for investment only if you did both.

    On conventional loans you can buy primary residence for less than 20% down. If just a investment property only where you do not live then usually you have to put 20% down.

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    13y

    The benefit to using a conventional loan for primary is that for instance you might be better off putting 5 or 10% down and getting a lower insurance rate than what FHA provides. The other benefit is that eventually you can go an request mortgage insurance be dropped after the balance is paid down to a certain point.

    One benefit to FHA is the loan is assumable down the road.

    At this point you really need to talk to a mortgage broker about the pro's and con's of each type of loan with interest rate, terms, money down, assume ability, etc. , etc. Then decide what is most important to you and narrow down your loan options.

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  • Simon Campbell
    Miami, FL · Member since 2012 · 612 posts · 189 votes
    12y

    Regarding the short sale property: In my experience, lenders are only looking at around a 5 - 10% market price discount on a short sale making your lowest offer price around $148,500. If that cannot cash flow for you, then I would suggest moving on.

    As mentioned before, FHA loans carry a higher APR, permanent MI which is at a higher rate than most lenders PLUS an upfront mortgage fee of 1.75% which can be wrapped into the loan. This makes this type of mortgage much more expensive than other loan packages.

    My suggestion is to get yourself into a bank and make sure that you can qualify for a loan. Then have your loan officer break down the pros and cons of their different loan options. Also, talk to them about grants and assistance for first home buyers.

    1Reply
  • George B.
    OP
    New York City, NY · Member since 2013 · 14 posts · 1 vote
    12y

    Joel, Simon, thank you so much for your responses. I really appreciate your help and insight. Looks like it's back to the drawing board for me. I've been talking to a mortgage person and I think I'm on a better path now.

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  • Simon Campbell
    Miami, FL · Member since 2012 · 612 posts · 189 votes
    12y

    Getting pre-qualified for a loan is almost required when putting an offer on a home these days. You should attach a copy of the bank approval letter with your offer. It will speed up the process; shows the seller you are serious and able to handle that property purchase amount; and it gives you an amount to go shopping with.

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