First Investment, is FHA holding me back?

Question

Hi everyone,

So I'm working with an agent to find a property that I could live in for a year (FHA requirement) and rent out after my year is over. I'm using Brian's "house-hacking" strategy using an FHA loan and I already got pre-approved for it. Based on my pre-approval, income, student loans, etc. I would have to look at houses that are bellow 200K. I also heard that "In real estate, you make money when you buy" so I found some properties that were between 60-90K but my agent told me that they are not FHA approved. The properties that she has for me are condos between 130-200K (with a C/C and/or HOA fee of around $200/month) and I think they are a bit too expensive for a rental investment. I live in Montgomery County, Maryland and know the area really well. The prices that my agent is showing me are reasonable for someone who wants to live in them. But for me, since I'm using the property as an investment, the prices are high. Now, I was wondering if I should invest or not.

Thank you in advance for your advice and suggestions.

Chris Mason · Answer

@Elif Erguclu, HomeReady is about 30% more work for the loan originator compared to FHA but doesn't pay any better. Hate to be blunt, but there you have it.

If that "more work but no more pay" dynamic weren't in play, we would see a LOT more people using Fannie Mae HomeReady, Mortgage Credit Certificates, et cetera.

For broader context for those curious, prior to 2013 it was lawful for firms to pay loan originators more depending on the structure of the transaction. Rather than using this to incentivize loan originators to give people better deals, firms mostly used this to incentivize loan originators to offer higher interest rates, ARMS, and other crummy 'features.' We saw this depicted in The Big Short, where the mortgage guys talked about how they wanted people with crappy credit, lower down payments, etc, because they could beat them up for those factors and give them garbage mortgages.

So, as a consequence, now we get paid the same regardless of how much we bust our butts to give you a better deal. For many loan originators, that just means no busting butts for anyone.

Elif Erguclu · Answer

Hi Russell,

The properties that I was describing are located in Germantown or Gaithersburg. I found some properties with the same criteria in Silver Spring, MD with a lower price (bellow 100K). They are not FHA  approved though. Another issue is that these condos are older than the ones in Germantown or Gaithersburg. So I'm really torn right now.

Elif Erguclu · Answer

Wow! That makes sense now.

So, if they already picked FHA for me and I think I would also qualify for a conventional loan, should I just tell them? What's the best way to ask for it?

Thanks for the clarification!!!

Elif Erguclu · Answer

Hi Chris,

I was thinking about that too. The real estate group that I'm working with did my financing and pre-approval. However, my question is: why didn't the person who did my financing offer that to me? Why did he just went straight to FHA? Even though I told him I had 10k for down payment.

Peter C. · Answer

Hi @Elif Erguclu,

There are some restrictions, especially if you're looking into multi-families. Expected rent (while you occupy a unit) must be > 85% PIT (Principal, Interest, and Tax).

Pete

Brandon L. · Answer

@Elif Erguclu you talked about making money when you buy, how much cash are you looking to make, how long will you hold the house for? How will you exit? Who is your ideal renter?

There are a lot of questions you can ask yourself to make your goals extremely clear and specific to both you, and your agent.

Also, sometimes to get the wholesale prices you have to put in some sweat on your own. Drive around looking for FSBO homes, talk to the owners, network with some wholesalers. Do whatever it takes to make sure you get outcome that fits in with your goals.

If you have any other questions or need anything feel free to connect with me.

Elif Erguclu · Answer

Hi-

So I have 10K for down payment and I'm buying to rent out.

Brandon L. · Answer

@Elif Erguclu there is some good advice on the thread for you, but it sounds like the agent might be doing the equivalent of a chef shopping at the grocery store for food to sell at a restaurant. Simply put, throwing retail priced properties at you when you want to buy at wholesale prices.

What are your investment goals for this purchase?

Chris Mason · Answer

@Elif Erguclu, yeah just ask about conventional options.

Note that FNMA HomeReady is income capped by census tract, and if your lender starts putting stuff about census tracts on your preapproval letter then your agent will murder that lender, so it's on you to do that homework for yourself. Here's the tool.

Chris Mason · Answer

@Elif Erguclu, yup condos need to be FHA approved to use FHA financing.

Why not do 5% down conventional, or even maybe 3% down conventional, if that's what you have your eyes on? FWIW my firm is killing it with Fannie Mae's 3% down option since we started offering it. :)

First Investment, is FHA holding me back?

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