What happens to an FHA loan after a year and want a new one?

19 Replies

I'm planning on getting an FHA loan to house hack but I don't know what happens after a year. Do you get the same interest rates and payments after a year and you apply for a new FHA loan? Or do you have to refinance the house and pay 20% down on the first house in order to get a new FHA loan on the second house?

@Jonathan Escobar

If you want another fha loan then you have to refinance the first one to a conventional loan. In very rare circumstances can you have two fha loans. Moving because of work, increase in family size, leaving a jointly owned property.

Originally posted by @Anthony Wick :

@Jonathan Escobar

If you want another fha loan then you have to refinance the first one to a conventional loan. In very rare circumstances can you have two fha loans. Moving because of work, increase in family size, leaving a jointly owned property.

So I have heard of people who house hack after one year to another property. How does that work? Lets say that you have a loan for $60,000 with an interest rate of 4% (For simplistic reasons, lets leave out mortgage insurance). After year one, you will have paid 12 payments of $436 each month about. After one year, you will have paid off around $1056.62 if you are going to refinance the house, you will only have $1056 of equity into the house because all of those payments were pretty much just interest. You were not cash flowing because you were living in the house and paying the difference. So would you have to come up with private money in order to refinance the house if you were to move into another house? (come up with 20% of $60,000 = $12,000- $1056=$10944)??

What options would I have if I don't have the capital to refinance and make a down payment on the house after a year?

@Jonathan Escobar

In the situation you described, most people do the BRRRR method. Buy, rehab, rent, refinance, repeat. They force equity into the property by fixing up a property that had deferred maintenance. Hence, there could possibly be 20-25% equity if the value goes up with the improvements. They refinance into a conventional loan, get their money back, and do it again.

Or, which is what I did, you house hack a property for a year while saving up 20% for the down payment on the next property.

It seems like it’s getting harder and harder with the way the market is. You need to pick the right market and the right home that needs rehabbing. The first couple are the most difficult. It gets easier after that.

@Jonathan Escobar

Or......you house hack fha at 3.5% down in your name only, and then you get your partner to do the same. It does require each of you to be able to qualify on your own for the loan though. That’s what my girlfriend and I did to get another property.

Why does Brandon Turner keep on talking about how you can do this over and over again? I'm confused how some of these people who say that you can get FHA multiple times are doing it? What is the ideal way to house hack if you don't have stable income to put a down payment?

I like the idea from Anthony where you can have an FHA loan and then have your significant other have one as well. That's pretty smart but what about the third house in the third year that you want to house hack??

To be able to recycle the FHA loan every year you need to BRRRR each of the properties you buy to gain the 20-25% equity. In the current market this likely means the worst property in the best area you can find. I've done it a few times but it's only been from doing major rehab of multifamily properties that cashflow well. The cashflow part is just as important as the equity gain because when you go to qualify for a second property, they will use the rent numbers from your first.

If you buy a previously rehabbed property in the current market, it is unlikely you will be able to ride the market to the 20-25% you need to refinance into a conventional loan. When you refinance it is important to get a loan product that is not tied to you occupying the property or you may be stuck there for an additional year depending on the terms of the loan.  This "investor" loan type often requires 25% equity and brings a higher interest rate. 

@Steve Pickenpaugh

You have to refinance out of the fha into a conventional loan. The requirements would be up to the institution financing your new loan. But yes, you'll need a new appraisal. I would talk to a financial institution as to what their requirements are, along with shopping around for the best terms. My local bank that I deal with uses their own appraiser.

@Steve Pickenpaugh

It might be easier to just get a low down conventional loan on your second property. Non-owner occupied you’ll be lucky to get a loan less than 20% down, but if you’re moving from your fha house hack to a new house hack perhaps you can get 5-10% down. I highly recommend finding a local bank to do business with and build that relationship.

@Anthony Wick

Good advice. I assumed there would be refinancing costs associated with changing financing also. My situation is actually slightly different I'm currently in a single-family house with a conventional loan looking at getting an FHA loan for a fourplex house hack and either selling my current home or using it as a rental. Haven't gotten comfortable enough with running the numbers as whether to use my current house as a rental but the first time the numbers didn't look like such a good idea. LOL

@Steve Pickenpaugh make sure to talk with the bank you plan to use before going under contract for the multi. I've heard some banks won't do loans if you're going from a single family to multi family because they know you are doing this for investment purposes which the FHA isn't exactly supposed to be used for. Worth asking the bank first.

@Jonathan Escobar in Brandon Turners book on rental property investing he talks about using forced appreciation to refinance. This means, that through rehabbing the home, you have increased the value of the home enough that you can use the new equity towards the “down payment” of the new loan.

For example.

Purchase a home worth 100 K using FHA loan with 10k down. Mortgage = 90 K. Equity = 10k

Do 20k worth of improvements to the property. House gets appraised at 140,000. Mortgage = 90 K . Equity = 50k

Refinance to conventional loan using 20k of equity on 90K loan and take out the 30K in cash.

Repeat

If forced appreciation isn't an option, you can also get a low-money down conventional loan. 

There are some 3% conventional loans, but very few. 5% is fairly common, as is 10%. Depending on where you are, the difference between a 3% and a 5% loan down payment can be pretty small or $10-15,000. I would recommend getting your real estate license after buying your first property (or before, if you have the time). Then you can negotiate a 3% commission, which gets split with your broker, so you'd get the 1.5% difference back at the end.