Yearly home-buying with FHA loans ... what should I be aware of?

13 Replies

The owner-occupied FHA loan offered by the government is one that is extremely useful for new real estate investors to purchase multi-family homes. Recently, I've thought about the possibility of gradually growing my real estate portfolio through buying properties each year with the FHA loan. To do this, me and my family would refinance our current property and utilize the loan on a new property each year. This is just one method I have considered for growing my real estate portfolio and I would love to hear the community's feedback!

What obstacles should I be aware of if I decide to pursue this method of growing my real estate portfolio?

@Wayne Brooks Thanks for the response! I've heard through my real estate agent and a couple podcasts that I would be able to re-use the FHA loan after 1 year of occupancy. Does the law vary by state?

@Cameron Norfleet Great point! Luckily the Salt Lake City market is strong at the moment which should help mitigate this issue. We are also working to accumulate enough savings to serve as a buffer when we decide to refinance and move.

@Cody Richard I used an FHA loan on a 4plex back in 2016 and it was a great tool. One of the requirements for an FHA loan is that the non-owner occupied rents of a fourplex or a duplex need to equal PITI. That doesn't apply to duplexes, as they count 75% of the rents towards your income. It's pretty difficult in the SLC market to get a 4plex with those kinds of rents that would qualify. Maybe in Ogden, Magna or Payson areas? But that's about it.

@Andrew Dean I appreciate the feedback! That's a great thing to consider, I did not know that. I've looked a bit into purchasing multi-family properties in Ogden and Payson. To your point, I agree that it will be difficult to find a property that has non-owner occupied rents equal to PITI.

@Cody Richard

So you want to FHA purchase than conventional refi in the same year so you can FHA purchase in the same/next year?

That’s a lot of loan origination fees!

Why do you like FHA so much vs conventional?

Owner occupied FHA beats conventional on the down payment but not by much and nowhere else. FHA may offer a lower rate but that doesn't mean squat if you are out of that loan in less than a year.

Why not buy conventional 5% down from the get go? Then no need to refi!

@Cody Richard

Just look up HUD's guideline:

4155.1 4.B.2.c FHA-Insured Mortgages on Principal Residences and Investment Properties

"To prevent circumvention of the restrictions on making FHA-insured mortgages to investors, FHA generally will not insure more than one principal residence mortgage for any borrower. FHA will not insure a mortgage if it is determined that the transaction was designed to use FHA mortgage insurance as a vehicle for obtaining investment properties, even if the property to be insured will be the only one owned using FHA mortgage insurance.

Any person individually or jointly owning a home covered by an FHA- insured mortgage in which ownership is maintained may not purchase another principal residence with FHA insurance, except in certain situations as described in HUD 4155.1 4.B.2.d."

Then note the only the exceptions where you may be allowed to have a second FHA loan at one time. The point is, only certain situations will allow you to own another primary home and use FHA financing.

@Max T. That's definitely a fair point. With the PMI and extra origination fees, I could see an FHA loan costing me more over the long-term. The reason I'm attracted to the FHA loan is because of the low down payment. The fairly low barrier to entry is definitely beneficial for me as I work to increase my capital!

As for your point on conventional loans, if I am able to find a 5% down conventional loan I agree that would be a great option! The lowest down payment I’ve come across up to this point is 10%. Is there a specific type of lender that would offer 5% down loans?

Originally posted by @Cody Richard :

@Max T. That's definitely a fair point. With the PMI and extra origination fees, I could see an FHA loan costing me more over the long-term. The reason I'm attracted to the FHA loan I because of the low down payment. The fairly low barrier to entry is definitely beneficial for me as I work to increase my capital!

As for your point on conventional loans, if I am able to find a 5% down conventional loan I agree that would be a great option! The lowest down payment I’ve come across up to this point is 10%. Is there a specific type of lender that would offer 5% down loans?

You should reach out to @Upen Patel . He is active on BP and has originated several loans for me. At least one was a 5% down conventional for my primary residence. Unless guidelines have changed recently any good lender should be able to do this for you, however, your debt to income ratio may play a role in how low the down payment can be.

The down payment requirements go up significantly if the property is not owner occupied. 

My guess is your strategy will work best if you use conventional loans and refi every year (plus a day). These loans require you to intend to live in the property for at least one year.

 

@Paul Defngin That's great insight! I have heard that you are not able to utilize the FHA loan twice at one time. It appears that I'll have to dig more into HUD 4155.1 4.B.2.d to understand what the "certain situations" are that allows you to potentially refinance and reuse the FHA loan multiple times.

@Max T. Thanks for the reference. I'll reach out to Upen and ask for his input for obtaining a 5% down conventional loan. I do plan to make these properties owner-occupied if needed. My strategy with the FHA loan was to live at a property for one year and a day, then refinance and reuse the loan.

Check out the Freddie Mac Home Possible loan as well for owner occupied 2-4 unit, it does have a first time buyer requirement and upper income limits. But if you qualify it's a much better loan product than the FHA, I used it to start out in my 3 unit. 5% down on 2-4 unit, conventional (stronger) offer and lower PMI that falls off automatically after 10 years instead of refinancing out with the FHA.