I'm working on the logistics of my first future deal, and I'm going to try to go with an FHA loan for a multi-family buy and hold. Most of the info I have found says that you need W-2 forms and tax returns from the past two years. I am soon to be a recent college graduate (May 2016), and I plan on investing as soon as I graduate and get a job (as a RE agent or property manager). But the problem is I haven't filed for any tax returns, ever (I don't make that much money at my summer job). Is there any way to get around this? If not, my back-up plan is to use private money to fund the deal because I don't want to wait two years after graduating to start investing. Does anyone have any experience or thoughts on this? Thanks!
Not having any tax returns is going to make it very difficult, and without a w-2 job will make it even harder. I would highly recommend house hacking to start. If you're not sure what house hacking is, there is a lot of blogs here on BP that describes it.
I would suggest talking to the bank of mom and dad who can not only lend you the down payment, but can also co-sign on the loan which can help you get that multi-family property.
Are you planning on living in the property? FHA requires that the owner occupy the house for at least a year into the loan. It can't be strictly investment property right out of the gate.
You'll definitely need to document at least some income via W2s or tax returns, but you don't necessarily need to show two years income history if you were in college during the last two years. However, the income you're using will still need to support the new mortgage payment, property taxes, HOI, mortgage insurance, and other debt expenses. If you can't show W2s or income taxes right now, you'll probably need to wait until you can.
Hope this helps!
Thanks for the reply, I am planning on making it an owner occupied investment to fulfill the FHA requirements. Will the bank give me any leeway on a loan if I can show that on top of my income, the property will be rented out to help cover expenses? Or is it strictly based on standard income?
Thanks for the tip on looking into house hacking. I wanted to make this investment without a co-sign, but if that's what it takes then I might have to alter my strategy.
@Blake Dowe I am in the process of getting an FHA loan, and they do allow you to account for rental income when processing the loan. I don't think it's 100% but it's a good portion (maybe 80-85%)
Hi @Blake Dowe , as an investor who did do a FHA loan, I would focus on getting your feet planted in the full-time job. Also, make sure you understand that the FHA loan process does not work like it did back before Summer 2013. There's new regulation that prevents PMI from being removed after 5 years (if you have a FHA loan under 20% down payment). If you were interested in removing PMI you would have to refinance, which may require 20 to 25% down after 5 years. This in turn would require a sizable investment back into the loan amount. I know the urge to start in real estate investing across BP is extraordinarily strong and you may not want to hear this, however, use the two years to do research. For example, if you were going to work in the Real estate industry full-time, do you also want to invest in real estate on the side? Perhaps diversifying your assets in stocks, ETFs, index funds, or bonds would create more safety and return in the long run. You don't want to end up with too many eggs in one basket. If you do decide you want to do real estate investing after two years, you'll have a steady job and income to serve as a baseline. Do not overextend. Good Luck!
If you're planning to live in the property, FHA financing is totally doable, and you can even use leases for the other unit(s) to qualify. However, you'll still need to document your own income. FHA will still want to make sure you have enough of your own income to cover the mortgage payment, property taxes, mortgage insurance, and homeowners insurance without taking into account the rental income.
See the following from the FHA lending guide (key statement in bold):
The rent for multiple unit property where the borrower resides in one or more units and charges rent to tenants of other units may be used for qualifying purposes.
Projected rent for the tenant-occupied units may only be considered gross income, after deducting the Homeownership Center’s (HOC) vacancy and maintenance factor, and not be used as a direct offset to the mortgage payment.
In other words, you won't be able to qualify just on rental income, you'll still need enough income from your own business or job to cover the mortgage payment.
are you saying that the PMI never goes away if you do not put 20% down?
If this is the case then what are the advantages that a borrower with the ability to acquire a conventional loan would realize other than a smaller down payment?
Thanks to everyone for the advice! I definitely have much more research to do and appreciate everyone pointing me in the right direction.
If you got an FHA loan before the new June 2013 guidelines for FHA, then you have the option of removing PMI after 5 years and I believe 78% Loan to Value ratio. You are grandfathered into this program if you got your loan before then. After the new guidelines passed in June 2013, new FHA loans with less than 20% down payment have PMI permanently attached to life of the FHA loan unless the mortgagee refinances to a new loan (presumably conventional).
To answer your question, I believe the best use of FHA loan nowadays is getting into real estate investing at a very low down payment. I personally don't think this is an overall great idea, however, many investors tout the low entry point as worth the risk and extra payments. Another issue with new FHA loans is interest rates will most likely rise by the time you can refinance into a conventional loan. If you can afford a conventional loan at 20%, that would be a good option in my opinion.
I agree with @Brandon Chin that conventional with 20% is the right path as finding private lenders can assist in providing the min cash for a good deal.