Mortgage options

13 Replies

I am looking to buy my first real investment property. It is for 125k with estimated 25k in rehab to make the basement into an apartment. I will live on the main floor. Rental of basement will be around 800-1000.

My question is: What is the best type of mortgage? FHA 3.5% down? 5% down? Conventional? 20% down to avoid PMI? I have enough cash to put 20% but I might want cash for future properties also. Thanks so much.
Jesse Lawrence

Jesse,

If you have enough to put 20% down, go conventional. It's cheaper, no MI, and is easier to get closed. Hope that helps. I am a licensed loan officer, let me know if you have any questions.

Theres a lot of different answers to your question depending on what you want to do in the future. If it were me...


If your goal is to continue doing real estate rentals I would put as little down as possible and keep your cash available for future investments.

If you can't afford to pay for your primary residence without the cash from a renter I would go ahead and put the 20% down to get your payments lower so it's easier to get by during vacancy periods.

my 2 cents.

I agree with @Joshua Springer - you're probably better off with a slightly higher monthly payment and cash in the bank than the other way around.

I would suggest 5% down conventional loan. It's been about 2 years since I did the comparison between FHA vs. 5% conventional, but I've seen stuff about FHA getting worse since then and conventional was better when I compared anyway.

With conventional 5% down, after you've completed the basement work or a minimum of one year (whichever is greater), you should be able to get the MIP removed from your payment by paying for an appraisal as long as it comes back showing you've got > 20% equity in the place. If you buy for 125K and put 25K into it and assuming you do a decent job with the remodel, this shouldn't be a problem.

Michael Siekerka

Excuse my ignorance but I thought that to qualify for a conventional loan, you got to put at least a down payment of 20%. That's my understanding. I just got confused when you stated that he could use a conventional loan with only 5% DP? Can you clarify this? If there's such a thing like conventional 5% DP, do you know what criteria must be had to be eligible for this option?

Thanks in advance.

Account Closed - the original poster is describing an owner occupant scenario in which he could possibly utilize an FHA loan or conventional 5% down loan. This definitely does not apply to investment or vacation properties, but does apply to OO (which is what was being described).

A conventional 5% down mortgage will require MIP, however the last time I compared the two, you're much better off with 5% down and MIP than 3.5% down, 1-1.5% up front insurance that is required by FHA. You end up with roughly the same payment, but a better equity position and the ability to have MIP removed with an appraisal or loan paydown.

OO loans, 10% down has a lower MI rate and is worth it over term to a future refi to dump the MI, if rates are good, 72% LTV I believe, that may vary slightly, too full to think!

Having debt is fine, being in a better position to pay it down or pay it off is even better.

If you have the money available, especially on a fixer, I'd not go FHA, they really don't like deficiencies with the property. If it's too much of a fixer, 10% down might be tough too.

Property condition will play on what you'll be putting down and if it will even go conventional.

:)

Ladies and gentlemen...if you're buying an investment property and plan to live in ONE of the units, we're obviously talking about a duplex, at a min.  The down pay min for a 2 unit is 15% on a conventional loan.  and for 3 - 4 units (owner occupied) it's 25%, not 20%.  

If it's not owner occupied then it's 15% for 1 unit and 25% for 2 - 4 units.  

@Joshua Springer if it were me i'd put down as little as possible if i intended to live in one of the units. this means FHA. it means only 3.5% down.

Please trust me when I say all this...i happen to do investment property loans all the time. :)

@Patrick Britton  

Okay, I'll bite. Why would the OP be better off with a 3.5% down FHA rather than a 5% down conventional (this is a 1 unit, OO). The costs of the MIP on FHA is substantially higher, and it is locked in for the life of the loan. He'd have to refi to get rid of it.

@Wayne Brooks  if it's 1 unit o/o then 5% down conv is best thing to do, hands down without question.  but he was talking about non o/o 1 unit and 2 - 4 unit owner occupied.    

Originally posted by @Jesse Lawrence :

I am looking to buy my first real investment property. It is for 125k with estimated 25k in rehab to make the basement into an apartment. I will live on the main floor. Rental of basement will be around 800-1000.

My question is: What is the best type of mortgage? FHA 3.5% down? 5% down? Conventional? 20% down to avoid PMI? I have enough cash to put 20% but I might want cash for future properties also. Thanks so much.
Jesse Lawrence

 HI Jesse,

Typical LO (loan officer) point of view you will get advised to put down 20% to avoid MI. The reason is because of the MI avoidance but few will tell you that you can buy with as little as 5% down with no monthly MI (sometimes lower down on niche programs) when buying as a primary residence on a single family/condo.

 What typical LO's generally do not look at is the opportunity cost of putting down 20% versus 5% down with no MI. 

With that said, you simultaneously have to do the "numbers," to make sure the basement rents jive with your goals  as well to make sure it will be a good deal for you.

Realistically 15% difference (putting only 5% down with NO monthly MI) is not that much payment savings anyway especially on 125k (its 18,750 dollars) is only about 100 dollars a month financed at 30 year fixed 4.50%. 

If the basement rents for 800-1000 you will most likely "live," for free from a monthly cash flow standpoint depending on how much property taxes are in your state when figuring in principal/interest/taxes/insurance/utilities.

If you have any questions feel free to shoot them over. 

Okay, but the OP is buying a 1 unit, then going to "create" a second rentable space.

@Jesse Lawrence  

If you're actually going to build an "apartment", verses a bedroom and space to rent, you need to verify zoning allows for 2 units, which I doubt if it's in a SFR neighborhood. If allowed, you'll want permits so it's legal, especially if you ever want to sell it.

Originally posted by @Patrick Britton :

Ladies and gentlemen...if you're buying an investment property and plan to live in ONE of the units, we're obviously talking about a duplex, at a min.  The down pay min for a 2 unit is 15% on a conventional loan.  and for 3 - 4 units (owner occupied) it's 25%, not 20%.  

If it's not owner occupied then it's 15% for 1 unit and 25% for 2 - 4 units.  

@Joshua Springer if it were me i'd put down as little as possible if i intended to live in one of the units. this means FHA. it means only 3.5% down.

Please trust me when I say all this...i happen to do investment property loans all the time. :)

He mentioned a home with a basement that he plans to rent out so it all depends on the zoning but if it is in fact a SFR with a basement its a single unit and can be financed with as low as 5% down with potentially no monthly MI.

Your guideline info is correct however it does not account for niche programs like Fannie's "My Community," program which can finance owner occupied first time buyer properties up to 4 units with as low as 5% down from a traditional sense, however there are other more advanced methods to use as little as 0-10% down to buy 4 unit properties if you buy it "right."

FHA may allow up to 4 units with 3.5% down but you pay 1.75% upfront financed MI and annually MI factor of 1.35% for the life of the loan which can be acceptable if the rents are high enough however there are better ways to acquire 4 unit properties than just FHA.

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