Financing out of FHA to conventional?

6 Replies

I am looking at purchasing a 4plex that needs light-moderate rehab as my first property. I am purchasing it with an FHA loan. I will live in 1 unit and rent out the other 3. The FHA loan stipulates that I must own it for a year and a day before I can sell it. I should have it fixed up rather quickly with regard to that timeline and would want to sell it post cash flow and rehab sooner than a year. How much would it cost me to get out of the FHA loan and into a conventional loan so that I could sell sooner than a year and a day?

Also I want to do a 1031 exchange on the 4plex so I would have to transfer to conventional, but would that even work since you cant do 1031 exchanges on a property you lived in?

@Ike Mouser

When you purchase a home as a primary residence you sign a disclosure at closing stating it's your intention to live in the property for at least a year. You'll sign this disclosure again even if you refinance into a Conventional loan, unless you refinance as an investment property rather than a primary residence. 

You may want to get advice from a 1031 exchange company or CPA, but as far as I know, 1031 exchange only applies to investment properties. You cannot use this if you live in it as your primary residence. If you live in it for 2 years though, you can sell with no capital gains tax. 

You are typically going to need to hold a loan for at least 6 months as well or you will be royally screwing your loan officer.

Cost for refi is fairly inexpensive. Pay for points, origination, appraisal, and title work. Most of those costs you can get rolled into the other loan so I think starting to talk with a lender and seeing what they can offer you and what's the min. vesting time for the loan is given the fact that you want to sell it. 

@Ike Mouser what lender is telling you that you must own an FHA property for 1 year and 1 month? That's completely untrue. You can most certainly acquire a property with an FHA loan and then sell it before 1 year is up. Now, your intention SHOULD BE to occupy the property. You will sign paperwork pledging to occupy the property within 60 days, etc. That's the whole point to FHA loans. So we don't want to do anything that isn't right...but there's nothing that says you can't sell the property. Plans change and so does life. There is NO PREPAYMENT PENALTY to any FHA loan. By definition, you can sell or refinance the property at any point penalty free. Now, if you wanted to get ANOTHER FHA loan within that year....well, the FHA might not allow that to happen. Please understand I am not advocating to do anything that is wrong or misleading but there is no restriction to selling or refinancing an FHA loan.

@Ike Mouser , There's some other factors you may want to consider.  

1. If you actually live there for 2 years you could then sell and take 1/4th of the profit tax free (the primary residence portion) . If you sell before that you will have to pay tax on the primary residence portion no matter what you do with the rest.

2. If you hold for two years you can not only take the primary residence portion tax free you can also 1031 the remainder of the property and defer the rest of the tax on the gain.

3. Selling at less than a year will have you paying ordinary income on the profit which will be much higher and will also include self-employment and probably the ACA 3.8% surcharge.  Get ready for 30 - 40% tax on your profit.