FHA Won’t Allow OO Duplex to 3-4 Unit?

Question

I have an owner occupied conventional duplex. It’s been a year and wanted to try to FHA into something bigger. 3-4 units.

Lender is saying the underwriters won’t buy that I would move from a duplex to a 3-4 unit and says that I would need 25% down to purchase.

Is this normal or should I pursue other lenders? Do I really have to explain that I’m just doing this to gain control over assets at a low cost?

Chris Mason · Answer

1) Occupancy fraud is the #1 type of mortgage fraud. Underwriters are on notice and on the lookout. A mortgage application is not a judicial proceeding, so the constitutional presumption of innocence is not applicable and irrelevant.

2) It needs to make sense. Is your commute dropping from 1 hour to 15 minutes? Are you picking up a bathroom needed for your teenage daughter? Is your dog needing a yard? Etc. This is key. Your motivation to buy another primary residence needs to be lifestyle, not profit, and credible.

3) No, all things LLC are a waste of time when it comes to residential financing. LLCs for people with a net worth below $5m exist primarily to be lawyer fee profit centers, nothing else. The judge will not give a single crap about what you read on google about the "asset protection" that comes with an LLC.

Scott D Burrows · Answer

@Tim Kaminski

Contact @Diana Muresan . I have worked with her and she knows how to make conventional loans and FHA loans work for investors. She is also able to lend in all 50 states, because she works for a federally charted bank.

She is very knowledgeable.

Good Luck,

Scott

Russell Brazil · Answer

If you own a multifamily, you wont be able to get through underwriting for a 2nd multi with FHA.

Andrew Postell · Answer

@Tim Kaminski I would absolutely look for a different lender.  I think the normal scenario here is that if you can show that you will be renting your current home that a reasonable bank will be ok with you receiving a FHA loan on a new property.  There's going to be some restrictions to this though.  This is DIRECTLY from the FHA selling guide:

If Rental Income is being derived from the Property being vacated by the Borrower, the Borrower must be relocating to an area more than 100 miles from the Borrower’s current Principal Residence. The Mortgagee must obtain a lease agreement of at least one year’s duration after the Mortgage is closed and evidence of the payment of the security deposit or first month’s rent.

Where the Borrower does not have a history of Rental Income for the Property since previous tax filing, including Property being vacated by the Borrower, the Mortgagee must obtain an appraisal evidencing market rent and that the Borrower has at least 25 percent equity in the Property. The appraisal is not required to be completed by an FHA Roster Appraiser.

What the above means is that if you need that rental income from the property you are vacating you will need to move 100 miles away.  Yikes!  If you don't need the rental income to qualify, then it doesn't matter.  BUT EVEN IF YOU ARE MOVING 100 miles away....and it's not on your tax returns yet....then you must have 25% equity to use the rental income.  DOUBLE YIKES!

It's almost laughable, right?  Pretty crazy.  I would certainly ask your next lender if you need that rental income to qualify.  That will help you know where you stand with this whole thing.

Good luck!

Scott D Burrows · Answer

@Tim Kaminski

@Andrew Postell is the man... if you are ever getting a property in Texas... use him. Just saying :)

He's probably one of the most knowledgeable, can-do lenders on BP.

I love his teacher mindset.

Again, if all people tell you is what you can't do, you are talking to the wrong people.

The right type of people might say that you can't do something, but won't do so without offering solutions or referrals.

Wish people wouldn't comment with only what can't be done... it's like... thanks a lot... so now what do I do? lol

Good luck again!

-Scott

John Warren · Answer

@Tim Kaminski if you can refinance the loan into a conventional  loan that would allow you to use your FHA loan again. I personally like this strategy because you then have a loan that does not require occupancy, so you are not doing anything shady. Have you created value in the property? Maybe you could cash out refinance into a conventional loan?

You can definitely figure out a work around and re-use your FHA loan again, but really think through your motivation. Investing is a long game, and if you can't come up with the 25% at some point the deal may not be worth doing.

Joseph Holliway · Answer

@Russell Brazil

Can you explain in detail what you mean? Why is that?

What are the recommendations as an alternative?

Would it be benefitial to transfer the property to an LLC, or would that be more problematic?

Account Closed · Answer

To "gain control over assets at a low cost" is not what FHA is about.  I linked to the section below that explains that FHA will not insure the property "if it is determined that the transaction was designed to use FHA mortgage insurance as a vehicle for obtaining investment properties, even if the property to be insured was the only one owned using FHA mortgage insurance."

Tom

https://www.hud.gov/sites/documents/4155-1_4_SECB....

Scott D Burrows · Answer

@Andrew Postell

Great stuff as always.... you are the man!

-Scott

Tim Kaminski · Answer

@Scott D Burrows Thank you!  Have reached out

FHA Won’t Allow OO Duplex to 3-4 Unit?

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