FHA to conventional on a rental unit?

Question

I currently own a single family attached rental unit in the suburbs of Philadelphia. I bought the house using an FHA loan, the house was appraised at 125 in 2009 and I took out a loan of 117. Last September I turned this into a rental unit which I am making about 300 a month on and using part of that to pay down the principal. My equity is at about 15% right now. I would like to buy a duplex in the near future but cannot afford the down-payment of anything above 5% really, so my idea is to convert this FHA loan into a conventional loan so I can use the FHA loan again to purchase a duplex for me to live in and rent out the other half.

Does this idea make sense? Would anyone advise against this? Is there a better option that I am not exploring?

Thank You.

Does this idea make sense? Would anyone advise against this? Is there a better option that I am not exploring?

Thank You.

Albert Bui · Answer

Hi Michael,

Not only will you need to qualify DTI (debt to income) wise but you'll need a min of 80% LTV (Loan to Value) especially on an investment property. The prudent path if you were properly guided would have been refinancing into conventional financing prior to converting the property into a rental on paper(filing as rental on tax returns) or in actuality (getting a tenant). The LTV requirements are much less restrictive on conventional financing when the subject property is a "primary residence." This is what I generally advise my clients do.

The problem now is if you're at 85% LTV you could do a couple things to refinance with out mortgage insurance:

- bring in additional 5% equity pay down to bring your loan to 80% and refinance (then you may not have funds to buy another FHA property).

- wait till a comparable sale in your neighborhood would allow an appraisal value to come in high enough to make your current loan balance, 80% LTV

Let me know if this helps.

Account Closed · Answer

I think it's ok if it's the only way you can buy property and add to your portfolio.  However, it is a bit expensive because you'll have to refi and absorb those costs.  Plus you'll need to qualify on rations for the next purchase.   I think you need to talk to a good loan officer and have them prequalify you based on that scenario and see what the numbers look like.

Clay Manship · Answer

@Steuart Wright

This is a pretty good thread for those trying to use FHA to their advantage. @Albert Bui

hit the nail directly on the head with this one. And no, it would be no more difficult if it were a multi-family property, because the standard looks at any 2-4 unit property you live in full-time as your "primary residence."

Once you get refinanced into a conventional loan marking it as your primary residence, let it go into your rental portfolio and do the whole thing over again. Rinse and repeat.

Albert Bui · Answer

1-4 unit with FHA for owner occupants only and no it's not difficult tonrefiniut to conventional just have to qualify.

Steuart Wright · Answer

@Albert Bui

Would this still go for multi-family properties where you are the owner occupant? I have a duplex in which I rent out one unit and live in the other. Would it still be difficult to convert from FHA to conventional?

FHA to conventional on a rental unit?

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