Rental Property Investor · Hackensack, NJ · Member since 2019 · 23 posts · 15 votes
Peace to the forum. So my partner and I recently got pre-approved for 224k from a direct lender and he suggested that we get an FHA and put around 7k down on a property. The problem is we're short on the money. I asked if I could find another lender to cover some of the downpayment and the original lender denied this. What should I do? I could keep saving obviously but I want to see what my other options are to come up with the rest of the money. Any suggestions?
If you can't afford the down payment of an FHA loan, you shouldn't be investing in real estate. That's not meant to be an insult, but it's an unfortunate truth that everything that can go wrong, will go wrong in the first year and that's the year that you will have the least amount of cash. Keep saving and don't buy the property until you have down payment PLUS a reasonable cash reserve for emergencies
If you can't afford the down payment of an FHA loan, you shouldn't be investing in real estate. That's not meant to be an insult, but it's an unfortunate truth that everything that can go wrong, will go wrong in the first year and that's the year that you will have the least amount of cash. Keep saving and don't buy the property until you have down payment PLUS a reasonable cash reserve for emergencies
I completely agree with Andrew B. On my first property that I purchased FHA there was a severe hail storm 2 weeks later that did $25,000 in damage. Insurance covered all but $8,000, but I still had to come up with that money within a month's time. Luckily I did have some reserves ready to cover the unexpected expense.
@Jelani Fearon Peace brother, my suggestion is if you find a property see if you can get a seller concession also known as seller's assistance for the property (up to 6% for FHA 203K) if you are buying owner occupied. Also, if the deal is sweet enough you maybe able to find a friend willing to put up some cash to help get the deal funded. As a contractor I'm familiar with the process.
@Jelani Fearon I also agree very strongly with @andrew you should have adequate cash reserves and in regards to @Cyrus Hanson the correct insurance policy to cover sudden and unforeseen accidents.
@Jelani Fearon are you first time home buyers? If so you can go up to 97% ltv on a conventional. Fha has higher upfront fees..I'd go conventional if you meet the requirements:
The mortgage is a fixed rate loan.
The property is one-unit single family home, co-op, PUD, or condo.
At least one buyer has not owned a home in the last three years.
The property will be the owner’s primary residence.
@Lynne Smith Really? How would I get 97% LTV on conventional? I thought for conventional loans you need 20%. Do I get this through a commercial bank or a direct lender? By the way I am a first time home-buyer.
@Jelani Fearon until a few years ago you had to put down 5% on a conventional. But more recently they made an exception to accept 3% down for first time home owners. Most lenders have a product for this. I work for WF and we offer that (but I'm not in sales so don't worry I'm not trying to get a commission lol.) Here's a link to the wells product page : https://www.wellsfargo.com/mortgage/loan-programs/your-first-mortgage/
The 20% down rule is just to avoid mortgage insurance, but yes you can do a conventional with only 3% down. You will still pay mortgage insurance but once you pay down your loan to 80% LTV you can drop the mortgage insurance. Whereas in FHA, u
You pay mortgage insurance for the life of the loan. That's why a lot of people with FHA mortgages refinance to a conventional loan as soon as they can.
You might be required to complete home buyer counseling. You can do it online. It's usually like $100 and takes 2 hours. Totally worth it if it means you can get conventional financing in my opinion. If you already have a loan officer you can just ask them if they have a similar program. Doing a lot of rate quotes can hurt your credit score so don't go crazy comparing loan quotes. In the end they usually aren't much different from one place to the next honestly.
@Jelani Fearon As others have said, definitely keep saving to build up your reserves on top of your down payment. See if you can find something real estate related to make some extra money. That is a way to accomplish 2 goals: saving more money, learning more about the business.
Have friends or family that will gift funds? That's an option. If you have available credit and can source gifted funds for the purchase, purchase the property and use your credit incase of emergency. Continue saving.
While I agree you should continue to build your savings and be extremely sure you can afford the home you buy, I want to add/clarify something. FHAs are not the only low-downpayment loans for primary residences. I assume you're buying your own house to live in, right? There are plenty of loans specifically for primary residences that are 3-5% down. You can jump onto most popular mortgage/bank websites and take a look at the general details very easily.
But don't forget, unless you negoiate the seller to pay it, you will also need to pay closing costs, and that's roughly 5% of the purchase price (on top of your downpayment).
As others have said and no offense, and maybe i missed something but if you dont have $7k in personal savings to cover just the down payment, you're just not ready yet. There are closing costs that can't be paid from seller concessions, you have to pay for inspections out of pocket and around NJ, you should pay for an oil tank inspection as well. Also, read this post and the comments on it, you should plan for and expect numerous problems you're first year especially as it sounds like you'd be a first time homeowner.
On the more helpful/less criticizing end, I dont have a FHA loan. From my experience, if you have good credit, there are bank loans that allow for just a 5% DP and the mortage insurance is cheaper than that of the FHA. However, if you do get help from friends/family or another lender, keep in mind that you'd have to get the loan/help and then have the cash sit around for at least 3 months before you apply for a loan. The lender will want your statement history and if they see that you went from sub $7k for some time and then got one fat abnormal deposit, they will ask about it and where it came from and deny the loan.
@Jelani Fearon I would firstly look into asking for Seller concessions, this would help a lot with closing costs straight out of pocket. 2nd, depending on DTI some lenders will allow a personal loan to be taken out to cover short funds for closing. If this is allowed by your lender, you can than ask if they can wrap a couple months of mortgage payments into the loan, this will now give you a couple months to pay back the small personal loan before your mortgage payments start. Just a different take on a possibility! Many ways for creative financing!
@Chao Liu Thank you got the honesty. I figured I wasn’t ready but I’ve heard on numerous podcasts to not let money be an excuse as to why someone should not get started. Currently I’ve read The Book on Rental Investing, Managing Rental Properties, And Book on Investing on Low Money Down, so since I haven’t been able to invest, I’ve been investing in my education. Once again thank you for your response.
That last bit was very helpful, unfortunately my family and friends are not in an economic position to invest but I am still looking to go to meet ups and network to see if I could meet other investors.
@Jelani Fearon. Don’t forget closing costs which will be another 3-5k. You need to save more money or find someone to gift you the money. That’s the only reasonable thing to do. Anything else is likely mortgage fraud or wreckless from a personal finance perspective
@Patrick D Green Right after buying my duplex last year, I had to spend for new HVAC and then main panel. Now this is not my first property, so have a healthy return. However, if you don't have adequate reserve to let's say cover 3-6 months of mortgage payments ( this can be used for repair until CAPEX is built up, once you find tenant), then you should work on building a reserve.
@Al Pat I totally agree with three to six months CAPEX. Issues like those (new HVAC, electric panel) should have been foreseen by a contractor or project manager to lower CAPEX before purchase or worked into the price by the buyer. I suggest lowering CAPEX by replacing items that would cost the most if it would need to be replaced and work it into the purchase price (negotiate lower sales price based off of upgrades that need to be made). I also advise clients (client dependent to put a larger down payment to cover the first year of mortgage. I usually work everything into the calculations for them. They are usually going to refi out anyway. But overall I still agree... if it can go wrong it will. Have cash, credit, good insurance and a great team. A great team reduces the chances of you running into these issues as well.