Is a FHA loan hands-down the best?

Question

My choices are:  a commercial 5/20 loan of 87,500 from a good, local bank with much experience who is lending 70% (assuming an appraisal value of $125k.)

Or, I was told last week that if we took it out of the LLC by myself, my husband (owners of the LLC) and put it in the name of my son (who lives there) and us, it would qualify for a FHA loan.

Questions:
1)  Does a full-income commercial appraisal come to the same loan value as a residential appraisal?

2)  Are there other downsides besides the loss of liability protection of not having an LLC own the property?

3)  What is the actual side-by-side comparison of the numbers between one loan type and the other?

Other notes:
My son lives in one unit;  we turned it from a SHF into a 4-plex.  A renter is in another paying $605/month.  Two units are not yet rented.  There is no loan or lien on the home now.  Our credit is good.  The monthly rent is $1,940 and the appraisal value is a great unknown.  The banker believes it could be valued at up to 190k based on rent income, but there are few properties to compare it to in that area.  It is for sure worth more than 100k, says an experienced realtor.

Thank you!

Kerry M. · Answer

Somebody prayed.  I met with the senior banker and almost canceled that afternoon's meeting with another banker.  The second banker has more leeway and writes a wider variety of loans.  He is offering a conventional 30 year fixed with possibly keeping the title in the name of the LLC.  We are waiting to see what underwriting says.  Thank you all.

Kerry M. · Answer

Lynn M.  I have our primary residence and the property we are seeking to finance, so a total of two?  Thank you for explaining the difference in the amount that we can pull out.

I talked to a senior residential banker this morning who said that Freddie Mac's requirements are the ones he has to pretty much go with.  Their requirement is 180 days for changing the names on the title.  He recommends going with the local bank with the commercial loan being offered and refinancing in 2 years, perhaps changing the names on the title 6 months beforehand.  He says in two years our equity, debt and seasoning issues would be gone and we would have two years experience with being landlords and two years rent income and would be very much in demand for banks wanting to do a refi.

Unless someone sees a better option, I guess we'll go with the commercial loan.

Thanks for all,
Kerry

Lynn McGeein · Answer

Kerry, I believe if it is a 2-4 property, FHA would only do 75% if your son needs you as non-occupant co-signer, much more (I think it's the 97% but could be less on a refi) if it's a single family home using a non-occupant co-signer, so looking for higher percentage of loan is probably going to be difficult no matter which one you choose.  FHA fees are very high, and I believe the MIP may now last for the life of the loan.  If you don't have 4 mortgages already, you could get conventional cash-out refi (not sure if it would have to be out of the LLC to do that if you are sole owners of the LLC), which wouldn't help with more cash out but you could lock in 15 or 30 years at these low rates.

Kerry M. · Answer

Joshua Andrews 
Thank you!

Well, there has been confusion on the commercial/type of loan.  PNC said I would do better to do a second home mortgage than commercial.  The first bank I have worked with the most says commercial, I thought because it was owned by an LLC.  A Farm Credit bank said they can do residential if it is under a certain amount, no matter how it is held.

I mostly want to avoid the refinancing in 5 years which would come from a 5/20 loan.  I'm also looking for a higher percentage of loan.

My best scenario would be to leave it in the LLC name but have a residential loan for the long-term rates.  It is a home that we would like to hold on to for a long time.

Thank you very much Joshua.

Joshua Andrews · Answer

Kerry,

Depends on what you want out of the loan. If I understand you correctly you own the home outright currently and your son lives there. Some quick answers for you....

1. This would not be commercial. Commercial is only for 5 or more units. You still fall under residential no matter what loan "product" you choose.

2. Yes! If you have even one renter you should have it in an LLC, land trust or both depending on your needs. Refer to an asset protection attorney for more on this.

3. Too many variables here to give you a straight answer. Basically some of the differences between FHA and conventional financing: FHA has a 1.75% upfront funding fee, monthly mortgage insurance which is now 1.35% of the loan, and can lend up to 85% cash out with no hits to pricing (read rate).

Conventional will have hits to rate, (read higher rate), no mortgage insurance and funding fee, but possibly points if you want to get the rate lower. Difficult to give you an exact $ figure unless I have all the details including FICO scores DTI and income.

Really depends on what your long-term plans are for the property. There is no "right" answer unless you have a definite plan. Then you can compare the numbers and you'll have your answer.

One thing to note on the appraisal... lenders wont be using the income method to value the property... it's still considered residential. So your value will be determined by comparable sales in the surrounding area - not your rents.

Hope that helps.