My wife and I are looking to buy a house in Long Beach, NY and we are first time home buyers. Our plan is to buy a 2 family house and use the house hacking method to get started as RE investors. Currently we have an accepted offer but still have not signed the contract yet (Hopefully this weekend). Once of the contigencies in the contract is to put down 10% (5% at signing and 5% down). We would like to pursue a loan between 3.5% - 5% down using an FHA loan. The only risk i see in going this route is if the bank inspector / appraiser does not want to provide lending due to dis-repair of the house. The inspection report came back with all systems in working condition but I was wondering if there was anything specific that FHA (HUD) inspectors look for. Any help with this would be appreciated.
Also I wanted to know if it was common to agree to 10% down in a contract and then later provide a commitment for a loan that shows only 3.5% - 5% down. Thank you in advance for anyone who can provide advice!
There is certain things that can hinder your chances of getting an FHA loan. Mostly things involved with safety.
Here's an article that explains it in depth.
The link that Patrick included in his reply to you is spot on. Lenders have to warrant that the property is in a certain livable/marketable condition to be able to provide 203b FHA financing. If the appraiser does raise concerns about the property's condition, then the underwriter will determine what needs to be cured prior to closing. If the repairs are minimal, you may be able to get into the property pre-closing - with the seller's cooperation of course - and make the repairs. The appraiser would then go back out to the property to verify the work was done.
Alternatively, if either a) the required repairs were to significant to do pre-closing or b) the seller will not cooperate, you could pursue another FHA program, known as a 203k. This is a basic rehab/renovation loan and could be the backup you need to get yourself into this house.
Two other points:
1) you need to speak to your attorney about the risk of having a 90% financing contingency, but wanting to take 96.5% financing. I can give you my take on this, but you need to rely first and foremost on your attorney.
2) Your other risk with the FHA loan is the appraisal value. If the appraiser brings in the value below the price, you'd have to put more money down to close the deal.
I did the FHA route on a duplex in the DC area last year. It was in decent shape, and didn't run into any major issues in the inspection. I ended up renting out a room in my unit as well and have been living for free ever since. In my opinion, the appraisal when buying isn't a real appraisal (they can see the purchase price), I refinanced a year after buying and was able to take out money and have 20% equity! (Based off appraisal of over 100k above purchase price) Make sure it's a good value, and you're golden.
I'm prepping for the next deal outside the DC area now.
Best of luck.
Thank you both for your responses! This is very helpful. In regards to my financing, There are 3 risks here: Not obtaining the loan due to various factors about our fanancial condition (very low risk here as we have great credit scores and our debt to income ratio is in the mid to low .30s.), appraiser finds something that requires repairs (low risk since I already got an inspection report that came back clean), and The appraiser values the house at a lower value (Wewould need to make up the difference with more money down). I think we are in a position to handle all three of those risks and manage them appropriately. Thank you again!
Thank you! @Michael N.
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