Two 1st Time Homebuyers looking at a Multi-Family exploring FHA

13 Replies

Hello, 

Background: I'm looking to buy my first multi-family rental property, a spacious two family home caught my eye in Rhode Island for about $180,000-$190,000, which should be able to get $3000 in rent a month, it needs a bit of work but is in a great location with upside. I'm looking to invest with my friend/colleague who does not have too much cash, but is a tremendous worker, dependable, and previously a contractor; he would bring lots of value in turning the property around and wants to live in the home while we fix it up and thereafter. 

Anyway, if the home qualifies, together we would apply for an FHA loan (minimize initial investment) with 5% down, this would be BOTH of our first time buying a home and in turn disqualify BOTH of us from being able to use an FHA loan individually.

Is there a way we can structure this deal so I don't have to get roped into the FHA loan with him and thereby allowing myself to use an FHA loan in the future on a separate property? It appears my options going forward are as follows:

(a) Get the FHA loan in my partner's name, structure some sort of arrangement / agreement (legally preferably), get the deal done, split ownership down the line after I use an FHA loan myself on a separate property. This would thereby allow us to work together as partners, and allow both of us to have access to an FHA loan individually, and in the future retain split ownership of this investment property. Ultimately, is this option feasible, I'm afraid it might get complicated, I am also unaware how the loans are structured in the first place and what sort of impact a partnership may have on a loan already in place with the installment of a 'future' partnership (likely we'd have to refinance?);

(b) Get the FHA loan in my partner's name, get the deal done, fix the house up, we figure out fair compensation for myself, he retains ownership and I move on;

(c) Buckle down, form an LLC, get the FHA loan in both of our names, make this property habitable and attractive, and push forward, find the next multi-family property using other financing strategies until we meet our goals.

Thoughts? Any opinions or incite on the matter would be much appreciated. Of course all this hinges on getting our offer accepted in the first place!

Thanks, Chris

Most importantly, why do you feel you need to go fha? Does one of you have credit issues or dti issues? Can you afford 5% down? How do you plan to finance the rehab?

Also, just to confirm, your aware if you fha you have to live in it for a year right? You also can't gift him money to close (assuming he doesn't have that) as it won't have time to season. I'm also pretty sure you can't assist his fha either. Also you can only have 1 fha at a time but after you fix it up you can always refinance out of the fha loan and get another fha loan on another property. 

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Hey Matt, my logic being: using a value of $190k, at paying 5% down or $9.5 versus 20% down or $38k, the FHA loan will allow more access to cash to buy the next property. No credit or DTI issues. I can afford either 5% or 20% down. For rehab financing, I would like to rope it the rehab costs into the FHA loan (or conventional) or consider using an FHA 203k or personal financing.

Yes, I understand that I (or him) in this case would have to live there for a year. Gifting the money to him is an option (what are the limits of this per year?). So in terms of my ability(or inability) to assist him, I thought FHA allowed for a co-signer?

So lastly, on the topic of taking out multiple FHA loans (one at a time), this is news to me, if I get an FHA loan, would I have to live in the property for a year to get another FHA loan on a separate property or if I did that within the first year of residency, I would likely have to refinance? How would someone be able to have multiple FHA loans? Does it even make sense to go with an FHA loan if I should have no issues with getting an conventional loan?

I'm sure there will be lenders chiming in shortly, however if you have 5% to put down you can go with a conventional loan and then not have to worry about FHA owner occupancy rules. With your all-in budget, even after reno AND paying PMI, it would appear you'll have a very nice margin of cash flow if $3k is coming in. But you'll probably not even be breaking even if one of you has to occupy a unit for a full year (loss of $18k in rent?!?!) Of course you'll also have to factor in taxes, insurance, capex, etc, so I don't want to assume too much here.

I'm not sure if loan products vary state-by-state, however some of the lenders I refer homebuyers to offer Conventional Rehab loans, which might help if your rehab work adds a decent return over your investment. Find a great mortgage banker in your state and see what they might be able to do for you.

Originally posted by @Christopher Kolasa :

Hey Matt, my logic being: using a value of $190k, at paying 5% down or $9.5 versus 20% down or $38k, the FHA loan will allow more access to cash to buy the next property. No credit or DTI issues. I can afford either 5% or 20% down. For rehab financing, I would like to rope it the rehab costs into the FHA loan (or conventional) or consider using an FHA 203k or personal financing.

Yes, I understand that I (or him) in this case would have to live there for a year. Gifting the money to him is an option (what are the limits of this per year?). So in terms of my ability(or inability) to assist him, I thought FHA allowed for a co-signer?

So lastly, on the topic of taking out multiple FHA loans (one at a time), this is news to me, if I get an FHA loan, would I have to live in the property for a year to get another FHA loan on a separate property or if I did that within the first year of residency, I would likely have to refinance? How would someone be able to have multiple FHA loans? Does it even make sense to go with an FHA loan if I should have no issues with getting an conventional loan?

So the reason I ask about the purpose of going FHA is that you will get a far better deal by going conventional. Most banks offer 5,10, and 15% down products along with the usual 20% down. Anything under 20% will still carry PMI but there are 3 big differences between FHA and conventional loans when it comes to PMI. Lets assume a loan of 5% down via FHA and 5% down with conventional.

1. with FHA you are going to end up paying up front PMI at closing which will be 1.8xx% of the loan amount or roughly $3,300! in your case. then you will still have monthly PMI. There is no upfront PMI on the conventional side.

2. monthly PMI on conventional loans are normally slightly cheaper then the PMI of FHA loans.

3. PMI does not drop off of FHA loans until you refinance AND have 20% or more equity, meaning if you get to the point where you've paid off 70% of the loan FHA does not care you will continue to pay that same PMI until you refinance out of it. With a conventional loan the PMI will automatically fall off once you reach between 18-20% equity in the property.

Side note, if you can afford 10% down that is often a good way to go because you'll fall into a cheaper PMI rate bracket vs putting 5-9% down. Though, you may decide that extra 10k is better suited on rehab which is understandable.

The principle reason to ever go FHA is if you can't go conventional due to DTI or low credit or you live in a wild area where the difference between 3.5% down and 5% down is 7k...

To touch on your questions FHA loans are specifically designed for owner occupants and the rules state FHA will not back one purchased for investment purposes. You are limited to 1 per person. there are exceptions that allow for 2 but they are rare and few and require special permissions.

you could in theory be a cosigner for him but the cosigner rules state you cannot have an interest in the property. So a bank may let it slide but technically if you 2 are investing together on a property, you have an interest in the property. Also most underwriters are not going to let a non family member be the cosigner.

As for a 'gift' you could give in 10k lets say and let it season in has bank account for 2 months then buy a place that would be fine but in this case you don't have 2 months. if you gave it to him for this house you'd have to sign a letter stating it's a gift and will not be repaid in any way. Which obviously, you expect a return from your 10k 'investment' so that's illegal and an underwriter will probably sniff that out as most friends don't give other friends a 10k gift...

I did exactly what you are thinking... Except I purchased a multifamily at a higher price point (better school district area). I also didn't buy a place that needed major renovations, although I just put a $20k roof on this year. My experience in multifamily buildings was 0, so my next property I may consider fixing and holding. The only downsides to fha is PMI and living in the building for a year+ which is what I wanted to do. I went with fha because it gave me the lowest payments with the least amount of money down. Maybe you can refinance down the road if the market stays strong. I have a friend who used the renovation financing and it worked well for him for the most part. Talk to some local banks and a broker to consider your options. You only get one loan at the 3.5% down, I would look for properties with higher price points if I were you.

Hey Chris, quickly skimming here but have you considered a first time home buyer program with DPA? I work for a competitive home loan lender here in RI and we have a ton of people like you applying for first time home buyer programs through Rhode Island Housing. Shoot me a message if this is something you might be interested in. Good luck!

Brian from NJ- With my partner occupying one of the units, we plan on agreeing on a reasonable rent and applying the income towards paying the mortgage, taxes, CapEx, and all expenses and anything on top would go towards a downpayment of the next property, I wouldn't see this as a loss of 18k$ as mentioned above. It appears the Conventional Rehab loan may be a viable option, thanks for the suggestion, what are the pros and cons of a Conventional Rehab loan versus an FHA 203k loan?

Matt from Ohio- Thanks for ironing out the FHA details, FHA is clearly not the way to go considering my stable financial situation relatively. We will get a Conventional Loan which will be likely be more suited for our needs and aim for the 20% down to eliminate any PMI. Also I don't have 10 grand cash lying around so a 10k 'gift' from my bank account probably won't fly either haha.

Matt from RI- Thanks for sharing your experience, did you invest in RI? If so where, and how the home working out for you? Is it cash flowing well?

Alexander- I have not yet considered this as an option, a DPA loan? I would like to learn more!

Brian from NJ- With my partner occupying one of the units, we plan on agreeing on a reasonable rent and applying the income towards paying the mortgage, taxes, CapEx, and all expenses and anything on top would go towards a downpayment of the next property, I wouldn't see this as a loss of $18k as mentioned above. It appears the Conventional Rehab loan may be a viable option, thanks for the suggestion, what are the pros and cons of a Conventional Rehab loan versus an FHA 203k loan?

Matt from Ohio- Thanks for ironing out the FHA details, FHA is clearly not the way to go considering my stable financial situation relatively. We will get a Conventional Loan which will be likely be more suited for our needs and aim for the 20% down to eliminate any PMI. I don't have 10k cash lying around so a likely a 10k 'gift' from my bank account won't fly either haha.

Matt from RI- Thanks for sharing your experience, did you invest in RI? If so where, and how the home working out for you? Is it cash flowing well?

Alexander from RI- I have not yet considered a DPA loan, I am actually a bit unfamiliar with it but am eager to learn more!

Hey @Christopher Kolasa

How many years do you plan on having the property until you can refinance out of the FHA, drop the PMI? If you look at an amortization calc, it could give you an estimate. Also you will cash flow much more once you drop the PMI- What is the PMI rate (percentage based monthly)?

Rhode Island housing offers programs for 1st home buyers, certain benefits etc. They also offer a Down Payment Assistant program that (clearly) assists you with your down payment. It acts almost as a 2nd mortgage to be executed at closing but essentially it's possible to buy a house (as a first timer buyer) with VERY little or no money down so you can start hopefully cash flowing quickly (with the right selection of course). Check it out! Google it and see what you think!

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