Refi FHA to conventional? Advice/guidance?

12 Replies

Hi BP,

I just purchased my first property on 3/31 of this year through an FHA loan. It is a duplex and I am living there now and going to start renovation very shortly. The house was appraised for 107k and I have a note on it for 100k. The property was in fair condition.. It had nothing to desirable inside the house, but the location is good.

My idea right now is to fix it up, (both units), to something a lot more desirable.. This way, when I move out, I can get more rent/unit and put sweat equity into the house. Now i'm wondering... If I could get the value of this property re-appraised for 125-130 through renovation (which I think is possible after seeing what it looks like as it is), would it be worth it to refi to a conventional loan to drop the monthly mortgage insurance payments?

My idea was that, if I could refinance through a conventional, I could increase my monthly income on that property, and use a new FHA loan on another property with 3-5k down again. This would make it very easy to get into a second property.. and perhaps repeat the process.

There are a few things I'd have to take into consideration: whether my renovation would bring the loan value/appraised value to 80%, refi costs, whether a bank would go for it, etc.. 

I plan on doing renovations regardless, since we are living in the property it will feel more like a home to us, and I could increase the rent income/property value at least some. 

Let me know what you think! I don't know a lot about loans and stuff yet, but I am learning a lot as I go. All opinions and suggestions will help.

thank you!

Joe

Definitely a good idea. Do your renovations, and at the 6 month mark, refinance out of your FHA loan so that a new appraisal can be used. Make sure you have a strong value so the new loan is at 80% of your new value to avoid mortgage insurance. A good broker/banker should be able to help value your property before you pay for an appraisal.

A couple thoughts.  

First, you mention being able to raise rent due to refinancing to a conventional loan.  Your lender has no bearing on your ability to raise rent.  I assume you were referring to the idea of forced appreciation from your improvements that allowed you to refi, but I just wanted to be sure.

Second, consider that when you refi, you will get the best rate and ltv ratio if you still intend to live there as primary residence. So while you may be able to refi out of PMI, you will be capped at 80% ltv. If you want more than 80% ltv, then you are still with PMI unless you do an 80/10/10 or some other hybrid. Also, again, for those more favorable rates, you wll have to sign a doc stating you will occupy the place as primary residence....likely for a year minimum but confirm that. So....that will delay your move into your next property via FHA. Also....depending on how much capital you have to sink into these renovations to increase the property value.....will you be able to pay as you go? If not, you may be forced to carry credit card or other debt, or borrow more than 80% ltv when you refi.

You will need to review the numbers and how it will impact you to make sure it is worth it.  But, I would be trying to do what you are in order to grow.

Also keep in mind, FHA does not want you using them as an investment vehicle, so even if you refinance and get out of the FHA loan, you may have to wait a period of time before they will allow you to purchase again through FHA. 1 year residency in that property and that's probably minimum, even if you refinance the loan per conventional guidelines---Fannie or Freddie.

They will probably ask you to provide some sort of reason---relocation, new job, larger family, etc. If you can't prove those things, you may not be able to get another FHA loan right away. You will also need all your docs, lease agreements and such and may need 6 months in reserves and that is not implying you are counting the rental property as income.

Originally posted by @Chris Simmons :

A couple thoughts.  

First, you mention being able to raise rent due to refinancing to a conventional loan.  Your lender has no bearing on your ability to raise rent.  I assume you were referring to the idea of forced appreciation from your improvements that allowed you to refi, but I just wanted to be sure.

Second, consider that when you refi, you will get the best rate and ltv ratio if you still intend to live there as primary residence. So while you may be able to refi out of PMI, you will be capped at 80% ltv. If you want more than 80% ltv, then you are still with PMI unless you do an 80/10/10 or some other hybrid. Also, again, for those more favorable rates, you wll have to sign a doc stating you will occupy the place as primary residence....likely for a year minimum but confirm that. So....that will delay your move into your next property via FHA. Also....depending on how much capital you have to sink into these renovations to increase the property value.....will you be able to pay as you go? If not, you may be forced to carry credit card or other debt, or borrow more than 80% ltv when you refi.

You will need to review the numbers and how it will impact you to make sure it is worth it.  But, I would be trying to do what you are in order to grow.

 No.. I would not be raising rent due to refinancing... I would raise rent due to a newly renovated unit.

And yes, that it something to think about. Renovations will all be out of pocket, I'm a good little saver. Thanks for the response!

Joe

Originally posted by @Damian Palmares :

Also keep in mind, FHA does not want you using them as an investment vehicle, so even if you refinance and get out of the FHA loan, you may have to wait a period of time before they will allow you to purchase again through FHA. 1 year residency in that property and that's probably minimum, even if you refinance the loan per conventional guidelines---Fannie or Freddie.

They will probably ask you to provide some sort of reason---relocation, new job, larger family, etc. If you can't prove those things, you may not be able to get another FHA loan right away. You will also need all your docs, lease agreements and such and may need 6 months in reserves and that is not implying you are counting the rental property as income.

 Hi Damian,

Yes that is true. Then again, I will likely be in this property for a while to renovate as it is. I may end up being here for that long. The plan is to renovate the top unit as we reside there, and when the bottom unit tenants move out, (October) then we will move downstairs, rent the top, and renovate the bottom. Thanks for the insight though.. You are probably right in the fact that they will want a reason.. I guess I will have to see how it work out..

At the end of the day, I wanted to renovate the units anyway. If i dont end up refinancing, I'd be collecting higher rent (assumably) on the same monthly expenses I have now. Thanks for your input!

Joe

@Joseph Shevy

I had a similar thought process as you when we got into our 4-plex about 7 months ago. After moving into the property we made significant improvements, raised rents by about 20% and planned on trying to refinance into a conventional loan in order to eliminate PMI. Also hoped to be able to rinse and repeat with the FHA house hack. Unfortunately as others have said this is more easily said than done.

Property Valuation: In my mind I figured using an income approach of valuing our property (post renovations) was appropriate... I was wrong. My intuition had me valuing the property as follows - Post Renovation NOI / Market Cap Rate (used our purchase cap rate) = Estimated Post-Renovation Value. Using this method would have put us right at 80% LTV. Unfortunately most lenders will only value smaller multi-unit properties based on sales comparables rather than on an income approach. Your market may be robust but, because there is low trading volume in my area and we are now at the higher end of rents within that area, there is no way we would have gotten the appraisal back where we needed.

Despite not being able to refinance into a conventional loan, we were however able to take advantage of the FHA streamline program that will cut out PMI almost in half and lock us in at an even more attractive interest rate. Rates have moved quite a bit in the last couple weeks so I am glad we locked when we did. When we do have 20% equity in the property (according to the lenders) I doubt we will be in an interest rate that will be worth refinancing. Just have to save up for the next property based on conventional loan standards.

Best of luck and hopefully you are able to swing this strategy for your next property!

Hey Joe, you're welcome. Just giving you a little info to think about in regards to a 2nd purchase involving FHA. Always good to have everything planned out in advance, even if it is a year or more down the road. It sounds like a good plan and you shouldn't have any trouble refinancing the FHA loan to conventional as long as your improvements will provide the LTV you are looking for, to avoid PMI.

I have a feeling the FHA requirements will be on a case by case basis, whereas whatever reason you give them for moving out and purchasing another home will have to be addressed in some fashion. They may just let you do it without requiring any type of formal explanation but it's always best to have an idea of what will be required before getting your hopes up too much. You know how the GOV works.

Good luck and congrats on your first purchase.  I just joined this group here and have been browsing through and it seems like there are plenty of knowledgeable people on here to answer any questions.  

Nowadays you have to refi to get out of pmi. Lucky me I did what you're doing back in 2010. Paid down the debt for a few years and made improvements along the way. When I thought I was good to go, I called the lender, ordered an appraisal for $395, and from then on saved about 200/month.

Thanks for the advice/suggestions/insight everyone! I got a lot to consider it looks like and in setting up exactly what I want to do.

Joe

@Brandon Turner

Thanks Brandon! Feels good to have a mention notification from a BP Legend!

In your experience, are there many conventional lenders who will value 2-4 unit properties on an income approach rather than a sales comps approach?