FHA Loan

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FHA Loan

Kyle Spinale
Lambertville, MI · Member since 2016 · 59 posts · 15 votes

Does anybody have experience taking out an FHA loan? If so, could you please describe the process of getting it (i.e. requirements/screening process). Also, how has it treated you? By that I mean, would you prefer this over a traditional mortgage. Why or why not? Thank you.

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Zach F.Business Member
Property Manager · Cincinnati, OH · Member since 2016 · 82 posts · 55 votes
9y

@Kyle Spinale I have experience with FHA loans on 4 unit buildings. In my opinion, this is one of the best ways to get started in real estate. The process of getting it is the same for conventional. Network with your local REI's and get referrals on a solid banker. Go sit down with them and explain your scenario and exactly what you are trying to accomplish. It'll be intimidating at first, but after each meeting you'll learn more and more.

In regards to FHA vs conventional financing, there really isn't a "right" answer in my opinion. It all depends on the person, their personal finances, their goals with regards to real estate, their goals with regards to other financial obligations, credit score, and many other factors. For me, however, I absolutely love FHA over conventional financing if you buy properly.

On the FHA deals, you only need 3.5% of the purchase price to bring to the closing table. On a past deal I closed on with an FHA loan, this is allowing for me to see a cash - on - cash return that is extremely favorable. I purchased a 4-unit building for $115,000 and only brought $3,800 down to the closing table. The building should rent for close to $700/unit after the leases are turned over and rents are brought to market value. We closed early in the month so the prorated rents helped out quite a bit, dropping the total cash-to-close. The prorated rents is definitely something to keep in mind.

All said and done, a $115,000 cash producing asset was acquired for a $3,800 down payment.  Two fantastic things have just been created.  The first thing is I had completely eliminated the cost of living from the previous living situation.  If you are a renter and paying $750/month in rent, you have just eliminated this expense from your personal finances.  Secondly, you are getting paid to live in 1 of the 4 units in the building from the other 3 residents.  

This is a bread & butter example of how to eliminate/reduce expenses and invest in assets.

True Home Ohio Property Management 4.4410 Reviews
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  • Adam Juodis
    Plainfield, IL · Member since 2016 · 139 posts · 53 votes
    9y

    Hi Kyle, welcome to BP! I have never gotten an FHA loan but I am fairly familiar with what it encompasses from readings/podcasts. The screening process is very similar to a conventional loan, but the requirements are a bit different. You also have to live in the property which you are using a FHA to finance for at least 1 year. Take a look at the BiggerPockets article on FHA loans below.

    https://www.biggerpockets.com/mortgage/fha-loans/

    1Reply
  • Kyle Spinale
    OP
    Lambertville, MI · Member since 2016 · 59 posts · 15 votes
    9y

    Thanks Adam! I appreciate the link and quick response.

    0Reply
  • Christopher Phillips
    Real Estate Agent · Garden City, NY · Member since 2016 · 3k+ posts · 1k+ votes
    9y

    Couple key points: FHA loans are FHA insured loans that allow borrowers to go in with as little as 3.5% down, still have some seller and lender help on closing costs (up to 6%) and credit score guidelines of 620+. You can go a little lower than 620 FICO if you put down 10%. Because LTV is greater than 80%, there will be mortgage insurance premiums (up front MIP 1.75% base of the loan and annual MIP of 55 bps).

    You are supposed to occupy the home you are buying for at least 12 months.

    The difference vs conventional loan is that the credit check requirements are a little bit more relaxed for FHA. If you have the credit to get a conventional loan, there are options for 5% down conventional loans with private mortgage insurance. FICO should generally be 740 or higher for a conventional loan to obtain the best rates. DTI rates are also tighter with conventional loans.

    So it depends on the borrower's financial picture.

    3Reply
  • Kyle Spinale
    OP
    Lambertville, MI · Member since 2016 · 59 posts · 15 votes
    9y

    Thank you very much Christopher. That's helpful information. All else equal, do FHA loans typically entail higher rates when compared to traditional mortgages? And are they reserved for single family homes, or can they be used for duplexes & triplexes as well?

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y
    Originally posted by @Kyle Spinale:

    Thank you very much Christopher. That's helpful information. All else equal, do FHA loans typically entail higher rates when compared to traditional mortgages? And are they reserved for single family homes, or can they be used for duplexes & triplexes as well?

    Based on everything I've read, it's the compulsory mortgage INSURANCE (which adds about 0.85% to the interest rate) that hits your pocket book each and every month, UNTIL you're in a position to refinance out of that loan once its appraisal says you have more than 20% equity, even though you only started with 3.5% equity (unless you were wise/lucky enough to buy significantly under market value on day one). Others may have more specific knowledge.

    Compensating you for that 0.85% premium is the fact that you get out of having to save up the normally required extra 16.5% of the purchase price in the first place!

    And yes, FHA-approved loans can get you into a single, or duplex, or 3*, OR 4-plex*! My 2c...

    * There is a self-sustaining requirement for 3/4-plex remaining rents, but, highly recommended!

    1Reply
  • Kyle Spinale
    OP
    Lambertville, MI · Member since 2016 · 59 posts · 15 votes
    9y

    That all makes sense. Thank you, Brent, for clarifying. 

    0Reply
  • Jerry Padilla
    Lender · Rochester, NY · Member since 2014 · 3k+ posts · 1k+ votes
    9y

    @Kyle Spinale

    @Brent Coombs has a great explanation! If you have the money to put down, than go the route of conventional and save on the fee's. If you are looking at purchasing a multi-family residence. If you are just looking to purchase a SFR than conventional may be the better route. Conventional only requires 3% down for a first time home buyer and 5% down for a SFR primary residence purchase.

    0Reply
  • Kyle Spinale
    OP
    Lambertville, MI · Member since 2016 · 59 posts · 15 votes
    9y

    @Jerry Padilla

    I did not know that you only needed 3% for a conventional loan. Can you put 3% down as a first-time home buyer if you're buying a duplex or triplex and plan on living in one of the units? Also, with such a low down payment, would the APR be fixed or adjustable? Thank you for the input.

    0Reply
  • Shawn Crawley
    Wholesaler · Roanoke, VA · Member since 2015 · 277 posts · 95 votes
    9y
    Kyle Spinale No to qualify for the 3% conventional it has be a single family from my understanding
    1Reply
  • Jerry Padilla
    Lender · Rochester, NY · Member since 2014 · 3k+ posts · 1k+ votes
    9y

    @Kyle Spinale

    That is only for a SFR - and a fixed rate product for a first time home buyer. A duplex is 15% down as a primary and a triplex and fourplex can be as low as 20-25% down for a primary.

    0Reply
  • Kyle Spinale
    OP
    Lambertville, MI · Member since 2016 · 59 posts · 15 votes
    9y

    @Shawn Crawley and @Jerry Padilla 

    Thank you both. I appreciate all of the help!

    1Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y
    Originally posted by @Jerry Padilla:

    @Kyle Spinale

    @Brent Coombs has a great explanation! If you have the money to put down, than go the route of conventional and save on the fee's. If you are looking at purchasing a multi-family residence. If you are just looking to purchase a SFR than conventional may be the better route. Conventional only requires 3% down for a first time home buyer and 5% down for a SFR primary residence purchase.

    Yes, that conventional loan news IS interesting for first home and other own-home buyers. But back to the topic of FHA, it's still true that (even if you're NOT a first home buyer) you should still only need 3.5% deposit to get into your own (primary) duplex, triplex or quadplex, right Jerry?...

    2Reply
  • Jerry Padilla
    Lender · Rochester, NY · Member since 2014 · 3k+ posts · 1k+ votes
    9y

    @Brent Coombs Absolutely! 

    0Reply
  • Kyle Spinale
    OP
    Lambertville, MI · Member since 2016 · 59 posts · 15 votes
    9y

    @Brent Coombs @Jerry Padilla

    Thank you guys!

    1Reply
  • Kevin Spring
    Angleton, TX · Member since 2015 · 9 posts · 7 votes
    9y

    I got an FHA loan for my first home after my wife and I finished graduate and medical school. When my wife and I were looking for a house we were not making enough money. We wanted a loan we're we could put nothing down and the FHA was the best option. We thought about the physician loan but the closing cost would be higher than the FHA and we would not be able to use gifts from families and seller rebates.

    We lived in the house over the 12 months and are currently buying a new primary residence and will rent out the FHA home.

    The process to get an FHA is more involved. You can go through almost any bank for an FHA loan so I would go with a local credit union to form a relationship with them if you can. I went with a larger bank. The loan officer disappeared on me and my application fell through the cracks. It took about 60 days to close.

    1Reply
  • Kyle Spinale
    OP
    Lambertville, MI · Member since 2016 · 59 posts · 15 votes
    9y

    @Kevin Spring

    Could you please elaborate on how it was more involved? Would you say that going through the process was worth the hassle? I do have a relationship with some bankers at my local bank; hopefully that can help. 

    0Reply
  • Zach F.Business Member
    Property Manager · Cincinnati, OH · Member since 2016 · 82 posts · 55 votes
    9y

    @Kyle Spinale I have experience with FHA loans on 4 unit buildings. In my opinion, this is one of the best ways to get started in real estate. The process of getting it is the same for conventional. Network with your local REI's and get referrals on a solid banker. Go sit down with them and explain your scenario and exactly what you are trying to accomplish. It'll be intimidating at first, but after each meeting you'll learn more and more.

    In regards to FHA vs conventional financing, there really isn't a "right" answer in my opinion. It all depends on the person, their personal finances, their goals with regards to real estate, their goals with regards to other financial obligations, credit score, and many other factors. For me, however, I absolutely love FHA over conventional financing if you buy properly.

    On the FHA deals, you only need 3.5% of the purchase price to bring to the closing table. On a past deal I closed on with an FHA loan, this is allowing for me to see a cash - on - cash return that is extremely favorable. I purchased a 4-unit building for $115,000 and only brought $3,800 down to the closing table. The building should rent for close to $700/unit after the leases are turned over and rents are brought to market value. We closed early in the month so the prorated rents helped out quite a bit, dropping the total cash-to-close. The prorated rents is definitely something to keep in mind.

    All said and done, a $115,000 cash producing asset was acquired for a $3,800 down payment.  Two fantastic things have just been created.  The first thing is I had completely eliminated the cost of living from the previous living situation.  If you are a renter and paying $750/month in rent, you have just eliminated this expense from your personal finances.  Secondly, you are getting paid to live in 1 of the 4 units in the building from the other 3 residents.  

    This is a bread & butter example of how to eliminate/reduce expenses and invest in assets.

    True Home Ohio Property Management 4.4410 Reviews
    WebsiteView Page
    6Reply
  • Preston Schmidt
    Lender · Minneapolis, MN · Member since 2016 · 61 posts · 20 votes
    9y

    Hello Kyle,

    I just typed out a whole bunch of information for you and nothing saved and I lost it all so here I go for round two. Sorry for the delay!

    I am a mortgage lender. What I would like to tell you is this. I have read all of these posts and I agree with just about all of them. What I would like to add is this. My favorite saying is "every loan has its own DNA" meaning every loan is different from one another and varies on the individual looking to take out the loan, their current financial situation, and the type of property they are looking to buy. In order to know what Is right for you, you must compare the options that you have:

    FHA financing has these benefits:

    3.5% down payment requirement

    Lower monthly mortgage insurance requirement

    Available for all individuals, not just for first time home buyers

    Allows up to 6% seller paid closing costs

    Can go up to 50% total debt to income ratio

    You can transfer your loan and interest rate to anyone else if you move (this is called assuming the loan)

    Downfalls to FHA financing:

    Very hefty up front mortgage insurance premium (as stated in previous posts) but can be rolled into the loan amount (called financing it in)

    Higher cost appraisals (more extensive requirements)

    More stringent/strict underwriting and guidelines

    You pay mortgage insurance for the life of the loan regardless of down payment

    Other options available to you:

    Conventional 3% down

    Down Payment Assistance Loans in your area

    Down Payment Assistance Grants (if available in your area)

    Renovation Loans as low as 5% down

    I hope this helps and let me know if I can assist any further!

    3Reply
  • Kyle Spinale
    OP
    Lambertville, MI · Member since 2016 · 59 posts · 15 votes
    9y

    @Zach F.

    Congratulations acquiring your property! It sounds like it went well for you, so far. 

    If you don't mind me asking, did you have any cash reserves going into this property? If so, if you don't mind, how much did you have?

    Also, did the property need to be fixed up or was it ready to go? 

    Thank you for sharing your experience.

    0Reply
  • Kyle Spinale
    OP
    Lambertville, MI · Member since 2016 · 59 posts · 15 votes
    9y

    @Preston Schmidt

    Thank you for listing the pros and cons. It was very helpful.

    Do you typically see new investors taking out FHA loans? Or are there experienced investors also using them?

    Also, how much would you estimate that the mortgage insurance raises your monthly payment? Or how much does it add on to your APR? I'm not sure if that's how it works or not but I thought I would ask.

    0Reply
  • Preston Schmidt
    Lender · Minneapolis, MN · Member since 2016 · 61 posts · 20 votes
    9y

    Kyle,

    Do you typically see new investors taking out FHA loans? A new investor with a solid credit score and excellent reserves and DTI ratio would be wise to go conventional. But to answer your question directly, I would say yes simply because FHA is a little more relaxed than conventional when it comes to multi unit properties/investment properties.

    Or are there experienced investors also using them? Yes even experienced investors use them because of the amount of "good debt" they take on, they are still higher risk and may still only be able to qualify for FHA since it is government insured, but again every situation is different.

    Also, how much would you estimate that the mortgage insurance raises your monthly payment? The monthly mortgage insurance or Up Front Mortgage Insurance that gets rolled in (UFMIP)? Monthly would vary depending on the interest rate and loan amount. UFMIP maybe brings the payment up $20-$30 per month but again also depends on the loan amount.

    Or how much does it add on to your APR? This is a good question. Most people worry about the interest rate on the loan more than anything but they forget to focus on what the Annual Percentage Rate (APR) is. The APR is taking in all closing costs, all UFMIP, monthly MI, and interest rate all into account and re-amortizing the loan over 360 months (30 years) which would lead to a much higher APR. Granted if your pay the loan off early  or a big chunk of principle the APR no longer applies unless you re-amortize it over the remainder number of years. Long answer short, it affects it a lot. Say you are given a 3.875% interest rate but with everything added in, your APR may look like 4.625%

    3Reply
  • Kyle Spinale
    OP
    Lambertville, MI · Member since 2016 · 59 posts · 15 votes
    9y

    @Preston Schmidt

    Sorry if those were bad questions. I understand that with real estate many scenarios are on a case by case basis; so I was just looking for ball park estimates. 

    Thank you very much.

    0Reply
  • Preston Schmidt
    Lender · Minneapolis, MN · Member since 2016 · 61 posts · 20 votes
    9y

    No worries at all. I just am happy to help in anyway I can!

    0Reply
  • Albert Bui
    Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    9y

    A FHA loan in reality is just like a conventional loan from the borrower experience except for the fact that there are more pages during the final loan doc signing.

    Both loans are 30 year or 30 year fixed for the most part (some are 5/1 ARM, etc depending on choice).

    FHA has a set criteria for mortgage insurance depending on your down payment and lasts for min 11 years or for the life of the loan while conventional you can customize it (single pay lender or borrower paid, split premium, monthly MI, etc).

    Qualification wise FHA is more lenient in some areas like debt to income it can go much higher than conventional however in other areas FHA is like a document nazi and will require almost every deposit to be documented (pro's and con's).

    FHA only provides owner occupied financing only while conventional financing you can go into primary, second, and investment properties.

    Documents wise there are a couple more disclosures with FHA upfront and during the process, however the loan documentation material you bring in is pretty much the same as conventional (paystubs, bk stmts, drivers lic, taxes, W2's, etc, etc).

    So while its more rigid in some areas its pretty flexible in others you just have to know how to use the product to its full potential and what the pitfalls are because there are some times when FHA is NOT the product you want.

    1Reply
  • Laura Safayan
    Lender · Colorado Springs, CO · Member since 2016 · 11 posts · 4 votes
    9y

    FHA can finance owner occupied 2,3 and 4 plex properties, meaning one of the units is occupied by the borrower.

    0Reply
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