Mortgage Insurance on FHA loan?

Question

Hello BP community. My wife and I, are in search for our first multifamily investment property. We will be using the house hacking strategy. We have ran the numbers on many, and have came across a few that might work. However, I was not aware of mortgage insurance on FHA loan. I am planning on only putting 3.5% down, so my mortgage insurance payment would be really high, and this brings my ROÍ down on those few potential properties to a negative. Has anybody else faced this issue. Any advice would be much appreciated. Thank you in advanced.

Nicholas Covington · Answer

@Hector Salas There really is no way to escape it unless you are going to put more money down. It’s either 3.5% with PMI for FHA or 25% down conventional for 2-4 units. At best you can go no doc route and get for 20% down.

So it’s kind of pick your poison. Another thing to consider is FHA self sufficiency test for 3-4 units. So if you are buying 3-4 units and no one has mentioned this test, you might want to find another lender. You’re welcome to PM me if you want concrete info.

Patrick Britton · Answer

@Hector Salas is your real estate agent and/or loan officer NOT making you aware of that in the beginning?  Considering how large those premiums are, it's beyond reckless to keep you in the dark.  I'd find another agent and loan officer today.

Stephanie P. · Answer

@Hector Salas

Before you do anything, please sit down with a real lender.  Someone that can explain the differences in products like FHA or a conventional, high loan to value loan so you can see the differences in cost both monthly and upfront.

@Zach Westerfield  Although VA doesn't have PMI, many veterans use the conventional product with 3% or 5% down instead of financing the VA funding fee.

Zach Westerfield · Answer

@Hector Salas Yes, PMI is required with such a low down payment loan such as FHA. the two programs I know that do not require PMI are VA loans and USDA loans, but you either have to be a veteran or buying a property in a rural area to qualify. Side note, USDA's definition of rural is not as small as you would think, so if you are not in a major city it might be worth checking to see if you qualify.

There are more and more banks also offering low down payment loans these days, but most that i have talked to will require PMI for anything under 15% down.

The other strategy is to treat the property like a BRRR. Find something that needs a little work, or has potential to add value. Buy with an FHA loan, then after a year or more refinance into a conventional when the price appreciation gives you 20% equity or more. This gets rid of the PMI. Just remember to factor PMI into your holding costs for the the period before the refinance. I have done this strategy before with a small multifamily.

Remember, the power of house hacking is you have different criterial. Even if your net situation is you are $100-200 negative cashflow each month, you are still in a better situation than having a $1800 mortgage payment. Hopefully you will be able to save the difference and continue to grow. In the meantime, you are building equity in your property by paying down the loan and hopefully appreciation. I wouldn't let the PMI stop you.

Ben Galbraith · Answer

Hey Hector,  I'm new to investing as well, but we had PMI on our home purchase due to putting 3.5% down.  Our approach was to do home improvements with the difference of 3.5% and 20% we needed to avoid PMI.  So we took the 16.5% and made home improvements in the first year. If I recall (this was back in 2014) our PMI was $200 or so a month which ended up costing us $2400 which was cheaper than putting the full 20% down and we were able to increase the value enough to refinance after the first year and have 20% equity.  Note that I live in Seattle and we have seen unprecedented value increase over the last decade or so.  For example our home has more than doubled in value according to our latest appraisal since 2014.

Realize there are risks and barriers to this approach. If you're not seeing values increase in your area then you may or maynot be able to get to the 20% with improvements?  Additionally if the market turns you could be paying that PMI until you're able to pay your principle down enough to refi.  Rates could go higher.

Other options could be to get creative financing.  Not that I recommend borrowing money from family, but my father in law and I worked out a deal when we bought our first house where he helped to finance some of the improvements we didn't plan on doing and upon refinance we pulled funds and paid him back with interest. (I'm sure if you listen to bigger pockets podcast you've thought of creative financing!)

Hope this helps and good luck.

Ben