Financing a househack - FHA vs Conventional?

2 Replies

Hi All,

I'm looking to get some community input on how you would finance a househack. I'm looking to purchase a 2 - 4 unit property and live in one of the units. I know that doing an FHA mortgage is quite popular on BP because it is a good way to get into real estate investing with as little money as possible. However, would you do an FHA mortgage even if you could do conventional 20 - 25% down? I have excellent credit, the ability to put 20-25% down and strong W2 earnings. I have spoken with some lenders and I have a few options:

1. Do an FHA and pay the upfront and monthly MIP

2. They have offered portfolio loans (10/1 ARM or a piggyback fixed 30) that would enable me to do 10% down without MIP but a slightly higher rate (about .25% higher)

3. Do a conventional 30 year with 20 - 25% down depending on the number of units

My ultimate goal is to live in the property for a year and then purchase another one in a year. With the first 2 options (FHA or 10% portfolio loan), I could easily have enough money for another downpayment. If I do a conventional, then I would look to do a HELOC in a year to reduce the property's equity position and put it toward the down payment of a second property. I've been told some credit unions will do up to 95% LTV HELOC so that would basically be like having an FHA mortgage without upfront or monthly PMI.

What would you do - pay a slightly higher rate (or MIP) now for more a higher LTV and hold on to cash for a year, or do a conventional now and pull out equity via HELOC in a year? My assumption is I can get a HELOC within a year of the purchase, but please let me know if there are more stringent holding periods to qualify for a HELOC.

Thanks!

Brendan

@Brendan Daly the FHA tends to have lower than standard interest, so adding MIP tends to make it about the same payment as conventional. At least that is what I saw when I ran the numbers a couple of times. For example, my FHA was at 3.5% interest, but a conventional was at 4.25%... Once I added in the MIP for my FHA they were basically the same thing, only the FHA required 3.5% down, which allowed me to purchase that property and have enough left over to purchase another investment elsewhere.

How are you at budgeting? Does it work better for you to have the cash available at 0% cost (not counting opportunity cost), or do you get too tempted to spend it? If temptation is a problem, then locking it into the asset and accessing with HELOC might be better.

I personally like having cash ready for deals, and I also used leverage heavily to expand. Any of the strategies work, just look at your long term goal and see what gets you there the best. Best of luck!

If you have the money to put down, go the conventional route. Although you shouldn't need 20-25% down for an owner occupied residence. There are 5% down programs. You will have to pay MI, but it will be much less than the FHA model, and there is no upfront MI.

BTW, FHA not only has the upfront MIP, but also the monthly MI.

It's alot, so unless you absolutely need to do it, go the conventional route.

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