Homepath 10% Down Investor Purchase No-Brainer!

Buying & Selling Real Estate
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Homepath 10% Down Investor Purchase No-Brainer!

Mitch Dowler
Investor · Tacoma, WA · Member since 2014 · 83 posts · 40 votes

I have long had 4 financed properties so I have been paying 25% down plus closing costs for each new investment. I takes time for me to scrape together that kind of money for my buy and hold investment style. When I heard the recent BP podcast on Homepath I ecstatic. I had also done quite a bit of investing out of state due to price point and cash flow but now with Homepath properties right here in Washington state surrounding Joint Base Lewis McChord now make sense. Crunching the numbers I can realize strong positive cash flow and a 16% ROI.

I am retired Army and have great success keeping my properties in this area rented to both military and civilians. I have turned properties within a week and good tenants literally line up around here with good marketing and a quality unit. Once I have 10 financed properties Homepath is still a great tool to move up to 20 Fannie Mae financed properties by putting 25% or 30% down.

This is a big help in building my portfolio and helping to replace my earned income for a real retirement. I think about it this way, for every new investment property I acquire under my criteria that is one more day per month for the rest of my life that I don't have to work!

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Albert Bui
Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
12y
Originally posted by @Richard F.:
@Mitch Dowler with Homepath loans when you only put down 10%, do you have to pay PMI? I have some Homepaths but put down 20-25%

Yes there is PMI. You can pay it monthly which is the most typical or you can pay it as a single premium which can be as much as 3.25 points at closing. This amount can be an upfront cost in cash or you can absorb this cost through electing a higher rate which is considered lender paid MI.

LPMI or lender paid MI can be done through a higher rate but sometimes there is not enough yield spread or rebate "money," available in your rate sheet to even absorb this entire cost through the rate you select. In this case you'll then have to pay the difference with cash along with down payment and all the other closing costs/prepaids/etc.

Just to buy a 10% down property that is non owner financed single family residence (not even counting the MI) its already 4.25 points adjustment meaning at today's rate of 4.625% 30 year fixed it would cost you 4.25 pts + closing and prepaid tax/insurance/interest.

To absorb some of the cost you could elect for a 5.125% which has 2.5% points in rebate so that would lower your cost from 4.25% pts to 1.75% pts up front. Your pricing at 5.125% 30 year fixed would then be quoted at 1.75 pts today. This also assumes 740 + fico score.

So the glitz and the glamour of the program is not as rosy as most people think, yes its still good but one should consider pro's and the con's closely.

The pro's are high leverage and no appraisal but cons are a premium in rate you'll end up paying (.125 to .25% in rate) plus lots of points for non owner and higher loan to value such as 90% LTV or 10% down. No Appraisal could be a con for some people because I've seen unscrupulous agents try to sell over valued property to unsuspecting new homeowners on the premise that this property didn't require an appraisal and that that was a bonus! What was not mentioned was that the additional sales price the buyer was paying.

Long story short I recommended the buyer go to standard conventional and the appraisal came in at 25,000 below and the seller(Fannie Mae) after back and forth negotiations agreed to reduce their price. End of the day the buyer ended up saving 25,000 dollars for the same property and the listing agent was peeved that I convinced the buyer to utilize standard conventional 95% LTV financing with no MMI (lender paid). This was back in June 2012 so times are different for sure.

So before you jump on the hype I would recommend to get all the information.

None of the above is to constitute pricing for your particular scenario but rather to explain how pricing scenarios work utilizing the Home Path Program.

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  • Mitch Dowler
    OP
    Investor · Tacoma, WA · Member since 2014 · 83 posts · 40 votes
    12y

    Fannie Mae was slow to reply and came back with a full price counter to my offer. I am coming back again with an incremental boost up on my offer. There was a failed sale on this place and no offers since. It was even posted as an ad and didn't sell. I know the neighborhood well having lived in the very desirable area and do still have another rental nearby. I am a persistent type so drive on I will. If I don't end up with a Homepath this time I have another ATM Machine investment waiting in the queue.

    0Reply
  • Mitch Dowler
    OP
    Investor · Tacoma, WA · Member since 2014 · 83 posts · 40 votes
    12y

    Sometimes things move slowly but they do move! I wanted to give an update as this Homepath property purchase progresses. The list price for the 1550 sq ft home was $206,900. After a failed sale it was reduced to $174,900. After negotiations we mutually accepted at $169,000 with Fannie Mae paying $5,915 in closing costs. Per my mortgage broker I should get a 5% interest rate. After the mortgage, taxes and insurance this should leave me $308 a month positive cash flow if I use a very conservative $1,400 per month rent. Most likely I will get $1,450 per month as I have another property in the same neighborhood that I just increased rents to this much. The property also comes with new stove, refrigerator, dishwasher, washer and dryer.

    Now for the best part, Fannie Mae just put over $12,000 in renovation to the property. It is newly painted on the exterior and interior, new carpets, hardwood floors down stairs, new bathroom fixtures, kitchen cabinets, two car garage. Looking at recent sales for surrounding homes and in addition looking at Zillow we will close with $50,000 equity in the property!!!!

    0Reply
  • Kyle Hipp
    Investor · Appleton, WI · Member since 2012 · 1k+ posts · 464 votes
    12y

    Mitch, why did the last sale fail? That seems like a large price drop for a defect free home.

    Is that about as good as it gets in your area? Looks like you will barely break even once you figure in maintenance, repairs and cap ex? Also the rents are even a ways off from even 1% of purchase price.

    Did you already have an inspection or perform one yourself as It would seem that a defect free property would have more competition from buyers and with you using financing it is not like you have a slam dunk purchase from the seller's perspective either to like your offer more than others. Thank for your insight.

    0Reply
  • Mitch Dowler
    OP
    Investor · Tacoma, WA · Member since 2014 · 83 posts · 40 votes
    12y

    Sometimes things move slowly but they do move! I wanted to give an update as this Homepath property purchase progresses. The list price for the 1550 sq ft home was $206,900. After a failed sale it was reduced to $174,900. After negotiations we mutually accepted at $169,000 with Fannie Mae paying $5,915 in closing costs. Per my mortgage broker I should get a 5% interest rate. After the mortgage, taxes and insurance this should leave me $308 a month positive cash flow if I use a very conservative $1,400 per month rent. Most likely I will get $1,450 per month as I have another property in the same neighborhood that I just increased rents to this much. The property also comes with new stove, refrigerator, dishwasher, washer and dryer.

    Now for the best part, Fannie Mae just put over $12,000 in renovation to the property. It is newly painted on the exterior and interior, new carpets, hardwood floors down stairs, new bathroom fixtures, kitchen cabinets, two car garage. Looking at recent sales for surrounding homes and in addition looking at Zillow we will close with $50,000 equity in the property!!!!

    0Reply
  • Mitch Dowler
    OP
    Investor · Tacoma, WA · Member since 2014 · 83 posts · 40 votes
    12y
    Originally posted by @Kyle Hipp:
    Mitch, why did the last sale fail? That seems like a large price drop for a defect free home.

    Is that about as good as it gets in your area? Looks like you will barely break even once you figure in maintenance, repairs and cap ex? Also the rents are even a ways off from even 1% of purchase price.

    Did you already have an inspection or perform one yourself as It would seem that a defect free property would have more competition from buyers and with you using financing it is not like you have a slam dunk purchase from the seller's perspective either to like your offer more than others. Thank for your insight.

    Kyle I invest in different areas, Washington, Texas, Missouri, and Indiana so far. Texas, Missouri and Indiana are strong cash flow areas with fairly flat appreciation. Washington has weaker cash flow with much stronger appreciation. I don't know the reason for the failed sale. Isn't that information proprietary? I always, always hire a vetted, licensed inspector and will have the inspection scheduled as soon as the office reopens Monday. We have our share of flippers and investors here but the Homepath option seems to have not been noticed by many investors. There were changes in December that improved Homepath for Investors. Positive cash flow allowing for maintenance and an 8% vacancy rate will be $100 to $150 per month. The big immediate draw for me is the $30,000 plus immediate equity combined with our appreciating market. This really pumps up the Internal Rate of Return to 26.5% using the more conservative $1,400 per month rent (most likely I will rent for $1,450).

    I could have purchased a property for $61,500 with the same square footage in Birmingham, AL with an IRR of a little less at 24% that would have cost me about $3,000 more to close on. The cash flow would have been stronger at $245 a month but it would have zero found equity at full retail price and experience little in appreciation. If I sell in 3 - 5 years which property will give the greater return?

    Over 3 years the Birmingham property will return $8,820 in rents and little if any appreciation. Now the Washington property will return $3,600 in rents and $30,000 in equity even if it appreciates zero over the next 3 years for a total of $33,600 and costing me $3,000 less in cash to close. Even if both properties appreciate at the same rate the higher priced property will still generate a greater return because of it's much greater price point.

    I am happy with my decision to include both strong cash flow and strong appreciation type properties in my portfolio. I do recommend starting your portfolio with a concentration on strong cash flow to help support your stronger appreciating properties you may or may not want to add later.

    0Reply
  • Kyle Hipp
    Investor · Appleton, WI · Member since 2012 · 1k+ posts · 464 votes
    12y

    Thanks again for the insight Mitch. I am in the Fox Cities in Wisconsin so I have a relatively stable market but more geared towards cashflow than appreciation. I have never banked on appreciation for an investment and that might be a product of my market. I feel I can control the cashflow side much easier. As for appreciation I tend to force it by purchasing properties that need repair and updates thus creating my equity in that fashion. I am not very familiar with "Homepath" but is sounds like Hud homes in my area.The caveat with Hud or any government owned home is that a sale can fall through for a major repair issue and they are not bound to disclose that information whereas a normal seller is legally bound to disclose issues that they are aware of or have been informed of. That is why I was curious if you had any information on the reason the last sale fell through. I am always of the belief that someone knows something I don't so I will ask the neighbors xabout any inforation they might have as well as looking into other avenues. I buy houses that I believe I have instant equity in as well however I also feel that a home sold, especially on the open market is sold pretty much at market value as it would have sold to someone else if the property is visible to many.

    I hope everything goes smoothly for you, I look forward to updates on the progress :)

    0Reply
  • Ramon Jenkins
    Real Estate Agent · Milwaukee County, WI · Member since 2009 · 3k+ posts · 525 votes
    12y

    @Kyle Hipp just fyi

    Go to homepath.com

    ( I am not very familiar with "Homepath" )

    Currently 4 available properties listed for Appleton

    Currently 12 properties listed for Outagamie County

    0Reply
  • Mitch Dowler
    OP
    Investor · Tacoma, WA · Member since 2014 · 83 posts · 40 votes
    12y

    OUCH, so the inspection revealed that the contractor for Fannie Mae painted over a great deal of rot in the siding of the building. Also the crawl space was ripped apart by animals. All the insulation under the floor and around pipes and duct work was torn off and spread around. Fannie Mae said they would fix everything as part of the deal but I decided to move on to another opportunity that was ready to go now and provided stronger cash flow but not as much equity.

    0Reply
  • Mitch Dowler
    OP
    Investor · Tacoma, WA · Member since 2014 · 83 posts · 40 votes
    12y

    I owe an update here! I have a licensed inspector look at the property. He found a couple of BIG problems. Much of the siding was rotted and the Fannie Mae contractor had simply painted over it. The crawl space had all the insulation under the floor, around the pipes and duct work torn down by animals. There was also a carpenter ant problem.

    Fannie Mae is going to completely reside the house and fix everything at the agreed upon price but I decided to move on. I already had other investments in the queue and decided not to spend my time dealing with repairs of this magnitude.

    This was a good experience but I will obtain much greater cash flow with other investments although less potential equity increases.

    1Reply
  • Scot Howat
    Investor · Hoffman Estates, IL · Member since 2014 · 434 posts · 185 votes
    11y

    Is this program discontinued?

    0Reply
  • Donald Dienst
    Engineer · Lincoln Park, NJ · Member since 2015 · 21 posts · 6 votes
    9y

    It is now. 

    From what I can tell in September of 2016 the homepath mortgage became the homeready mortgage and they removed support for investors. Now there is a requirement that you can not own any residential property in the USA to get a homepath mortgage.  Apparently, I snuck in under the wire closing my loan in July.

    I was using the personal residence loan program but homepath allowed you, at that time, to own other rental property as well. 

    Not anymore.

    --DDDienst

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