New guy with a couple of questions FHA loan?

15 Replies

Hey everyone!

I am looking to purchase my first house/investment property. I am looking at multi units, duplexes or quad and I have a couple of questions.

• Is it worth me getting the FHA because of the 3.5% down payment with the added monthly fees that lowers my monthly cash flow?

Or go conventional and pay a 20% down payment and make more cash flow monthly?

• And if I went with FHA. how long does that have to be my primary residents? I am looking to live in one of the units for 2-3 years.

Any other positive or negative information you think would help me make a decision on what to do would be appreciated!

Thank you in advance,

Mike Layden

Hi Mike, Welcome!

If you do FHA, you have to occupy the property for a year. If you are living there it may make sense depending on your situation, but the mortgage insurance is killer. You may look into conventional owner occupant loans that can have the mortgage insurance removed after your loan balance reaches 80% loan to value.

You will make more money with 20% down, but it all depends on how much cash you have and what you want to do with that cash if you do go with the lower down payment.

Mark Ferguson, Real Estate Agent in CO (#IA40029358)

@Mark Ferguson I like the FHA just because of the low down payment and that I could make another move after getting situate and units rented.

But, I would rather make a better cash flow each month.

The other risk I also think of is planning to make another good move and not being able to find one for 6-9months.

Thanks for your reply!

If you do conventional owner occupant you can get 5% down loans and maybe less depending on the programs available in your area. FHA is going to have more mortgage insurance and it will be there forever on that loan. With conventional you can get the mortgage insurance removed once you hit 80% loan to value.

Mark Ferguson, Real Estate Agent in CO (#IA40029358)

Well I guess I have to go and find out! Thanks for your advice @Mark Ferguson I appreciate it!

Personally, I'd rather go conventional if possible. the up front funding fee and the monthly MIP (required for a minimum of 5 years) really adds up.

I agree with the previous responses, the MI is going to be much higher on the FHA and stick with the life of the loan, if that's worth it to you then the leverage is nice. Aside from that please be aware of the maximum loan to values on multi unit properties compared to single family residences

1 Unit owner occupied 95% LTV maximum

2 Unit owner occ 85% LTV

3-4 Unit owner occ 75% LTV

@Britt Abbey thank you for advice.

@Jesse Gonzalez could you explain loan to value a little. Not sure I fully understand that. Thank you!

Hope this helps,

LTV - Loan to Value

The loan amount provided based on a percentage of the purchase price

Example : if purchase price is 100,000

conventional financing 80% LTV

down payment = 20,000 - 20% of purchase price

loan amount = 80,000 - 80% of purchase price

The bigger the down payment the less risk for the lender

The less risk for the lender the less of a need for mortgage insurance

multi-family residential properties generally have fewer comps than single family residentials , therefore the risk for the lender is greater which explains their need for a larger down payment.

@Matthew F. great explanation Matt! Thank you!

@Matthew Ferguson I remember reading somewhere that if you go FHA, when you get to 80% LTV, you can ask the bank to cancel PMI. Am I mistaken?

@Jesse Gonzalez I have never heard Of different loan to value ratios for FHA on different amounts of units. I have searched for the info and can't find anything like that online either. Do you have a source for that? Thanks

Mark Ferguson, Real Estate Agent in CO (#IA40029358)

@Mark Ferguson Thanks for asking me to clarify, the loan to value restrictions are for conventional loans, not FHA, I didn't clearly break that down in my original response.

Originally posted by @Mark Ferguson:
@Jesse Gonzalez I have never heard Of different loan to value ratios for FHA on different amounts of units. I have searched for the info and can't find anything like that online either. Do you have a source for that? Thanks

Jesse's LTV's for conventional financing are right on for primary residence assuming the borrower has 1-4 financed properties as LTV's get lower (higher down payments needed) when going 5-10 fin properties. The advantage I see with FHA is you can acquire 2-4 unit properties with the same LTV's as a single family residence with as low as 3.5% down but you'll have to live there as a primary home. FHA doesnt have different LTV's for units (key distinct advantage).

In southern CA the prices are so high along with expensive FHA monthly MI that it only makes sense in rare occasions to do this. Case in point is Huntington beach or Hermosa beach where 4 plexes can run around 900k to 1.2 mil average for a C class type of building and cash flow will barely gross enough to even handle all of the mortgage taxes insurance and MI even if you managed it yourself and moved out. The plan could be to refinance into conventional and move out later on, but can be a risky play depending on where the market is and how tight the cash flow is.

However in lower price to rent ratio markets using FHA or VA to finance 2-4 unit properties to live in one and rent the others out can make sense cash flow wise. I've seen in some WA and TX fourplexes that gross rents from the remaining three units are enough to debt service the entire expense of running the building while providing payment less room and board in the 4th unit and some additional cash flow each month too.

Hi Mike,

I think the big question is how quickly do you want to progress with purchasing more properties? FHA requires the least down payment but does have life long mortgage insurance. You can refinance down the road when the principle is paid down and go conventional. Will putting the 20 percent down hold you up from purchasing another investment? In this case the mortgage insurance may be worth the profit that you will make on your next investment

Originally posted by @Mike L. :
Hey everyone!
I am looking to purchase my first house/investment property. I am looking at multi units, duplexes or quad and I have a couple of questions.

• Is it worth me getting the FHA because of the 3.5% down payment with the added monthly fees that lowers my monthly cash flow?

Or go conventional and pay a 20% down payment and make more cash flow monthly?

• And if I went with FHA. how long does that have to be my primary residents? I am looking to live in one of the units for 2-3 years.

Any other positive or negative information you think would help me make a decision on what to do would be appreciated!

Thank you in advance,

Mike Layden

FHA requires you move in within 60 days of close and to live there for a min of 12 months.

To answer your question about I will provide an example from an investor/financial planners point of view:

At 3.875% 30 year fixed FHA the mortgage constant or payment is a factor of 6.993% which means that for every 100,000 you borrow it will cost you an annual cash out flow of 6,993 dollars per year (582.74 per month).

This 6,993 only represents principal, interest, and mortgage insurance monthly payments other things to take into context may be assessments, property taxes, and insurance as well but to make it simple I only focused the details that came with the FHA loan - int/prin/mi.

So if you can earn more than 6.993% cash flow per year on your money it may make sense to utilize FHA to purchase this property because for each dollar you're borrowing your paying a rate of 6.993% annually for the use of that incremental "dollar."

If you're confident you can earn more else where then you could put down the least money possible and side with more leverage by investing the rest of your down payment else where. It all depends on your risk tolerance, reserves, alternative opportunities, and knowledge/skill to do so.