Hey everybody. I want to start looking at financing for a fourplex property in NJ and I am stuck on the fence between FHA or Conventional financing. This would be my first time buying a house and I am looking to house hack for at least 2 years and purchase a $400-450k property. I would be able to put down $40k and another $5k for closing costs. So far I have gathered:
- Low 3.5% downpayment
- Required to live in the house
- Can only have one FHA loan
- No PMI once you hit 20% equity, or find a bank like Trustco Bank which doesn't require PMI
- Usually higher interest rates
- Higher downpayment
Another thing to consider is that I am working full time right now and I have about $30k in student loans left to pay off (estimated $400/month). I was originally leaning towards the conventional because of the lack of PMI payments but now I think I should do FHA because I would like to purchase another property within a year after this purchase. Any recommendations? Thanks
FHA is good option if you are looking for lower interest rate and lower MI even though your score is lower. Have your run the figures in both products? You can purchase fourplex with 5% down payment under home possible as primary residence.
Btw, I'm in the town next door in a similar situation. Ultimately though, I'm going with an FHA because it keeps more capital free. Also, a conventional loan on a 10% down payment with a higher interest rate and PMI will most likely be significantly more expensive than a lower interest FHA. And then the fact that you want to buy another property relatively soon means you need to keep as much as your funds as possible.
@Nicholas Sheridan, Jr. id recommend from experience so you have more to invest in the future is to do fha. The pmi is probably your biggest negative but it's worth it when you can use that other money elsewhere. Plus, when you buy the house, typically there are small changes you wanna do so you'll be able to do them. Where are you looking to buy and are you preapproved already?
@Johnathan Boyle Thanks for the response. That was my exact thinking as well, I would have money available to do the other deal. I am starting my market analysis this weekend and will be going through the pre approval process after that.
@Marcus Lawson Thanks for the response. I agree, I think I would be paying more with the conventional. I have heard great things about FHA first time buyer incentives.
@Harjeet Bhatti Thanks for the response. I have not run the numbers yet but that is on my list of things to do! I think I need to do more looking around for different rates/terms.
@Nicholas Sheridan, Jr. Before you shop for rate and term you have to find out the right product. Otherwise this will be waste of time for you to shop around. Find out which product will be good on your loan scenario.
@Nicholas Sheridan, Jr. Awesome. Please let me know if you would like referrals to some lenders on this matter.
Utilize the FHA Loan first.
I found out the hard way that the FHA apparently does not allow you to already own property within a 100 mile limit of where you will owner occupy your FHA property.
@Harjeet Bhatti What do you mean by "product"?
@Brian Garlington That is a really good point, I had no idea about that restriction. I will definitely add that to my pro/con list. Thanks!
@Nicholas Sheridan, Jr. You pick FHA or conventional so you can compare right lender. Not all the lenders are same in each product. Some are good in FHA or conventional.
@Nicholas Sheridan, Jr I used an FHA to buy a large 3 family in Jersey City for a purchase price of 790k two years ago and I highly recommend it. Everyone get's hung up on the PMI, but the reality is that FHA rates are about a half a point lower right now so it comes to nearly the same payment. Additionally, the PMI is currently tax deductible on the primary residence so you will be able to deduct the entire PMI just like the interest. Even if that goes away you will be able to deduct 3/4 of it as a business expense while you are living in it and 4/4 when you move out. With all of that said, I used the additional capital to purchase more property which is why I wanted to hang on to the cash. If your intention is to purchase more property, I'd hang onto as much capital as possible. The low down payment will give incredible cash on cash returns and mitigate the risk in the worst case scenario. The best case scenario is if you can find a good price on a very large 4 family right around the FHA maximum, which is extremely high in most of NJ. Just remember you can only do the FHA deal once, so make it count. I have a great broker I can recommend who made the FHA process seamless if you would like.
@Nicholas Sheridan, Jr what the lowest rates you have been able to find for non-fha? I've had trouble finding less then 20% down on conventional multi-family.
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