FHA + Owner Finance to avoid PMI?

Question

Hi All,

I just was wondering what others though of this idea. My husband and I got approved for an FHA mortgage, it requires 3.5% down. Unfortunately with FHA they also require PMI until we owe less than 80% of the loan.

Now my thoughts are, what if we can talk the owner into financing 20% of the purchase?

Could this get us around the PMI requirement and allow us to have an overall lower payment which would result in more cash flow immediately?

The price we're looking is about $250,000, so a 3.5% downpayment would give us about a $230/month PMI, is there a way to structure it with owner financing to make it a better deal? OR should we tough it out to accelerate the payments so we can get below the 80%? The property with us occupying one unit, at least the one we are looking at is $300/month cash flow positive after estimated maintenance/bills

I'd like to have more cash in hand so we can flip the units and increase rents (all the units in our area for sale are horribly dated).

Thanks!

Nate Burnett · Answer

Thanks all for the feedback. I guess my creative financing skills aren't that great yet ;) We'll get in an get this unit getting us some nice cash flow and refinance once we have the value up then to get rid of the PMI.

Zack Karp · Answer

@Nate Burnett

Hi Nate.  FHA requires MI, regardless of the LTV.  Conventional financing you can avoid MI with 80% LTV 1st mtg but the subordinate financing (the seller financing) does not allow for 100% financing, you would need to put 5% down instead of 3.5%.

Your calculation on the MI is off though, on a 250K purchase price with 3.5% down, the monthly MIP would be about $170/mo.

There are creative ways to finance your purchase, especially for an investor doing a house hack and/or looking to refi soon.  You should increase the rate and get a lender credit to cover all your costs, the upfront MIP, and all your prepaids.  The breakeven point on that is years down the road (usually around 5-8 years).  This will create more cash in hand for you if done right and will save you a ton of money.

Make sure you are working with an investor-friendly lender that understands what you are trying to do, and can advise you accordingly.  Let me know if you have any other questions!

Cameron Tope · Answer

@Nate Burnett I tried the same strategy with my primary residence. I put 3.5% and my plan was to fix it up and refi out. However, the fees associated with FHA and refinancing made it more costly than I suspected. I purchased for 189k and the fees with FHA were ~10k and the refi fees were about 10k too.

Ensure you are factoring these costs into your calculations.

Good luck!

Zack Karp · Answer

@Nate Burnett

No FHA it doesn't drop off at 78%.  That's only for conventional, and only with regular amortization (without any acceleration).

And no the lender credit has nothing to do with 203K.  203K is a rehab loan.  The lender credit can be done with either a regular FHA or 203K.

Chris Mason · Answer

@Nate Burnett - Currently originated FHA loans will always have mortgage insurance for the life of the loan. All of them. The website you referenced is plugging refinances, not purchases.

What you're thinking of would be combined with conventional financing. When the first lender finds out about it, however, it'll be a dealbreaker.

http://www.investopedia.com/terms/s/silent_second_mortgage.asp

Wayne Brooks · Answer

As of a couple years ago....MIP for FHA loans with less than 10% down, is for the life of the loan, can not be removed.  Loans with 10% or more down, minus MIP for 11 years. "Lender credit" means they charge like  a .25% higher rate, but give you a "credit" of $5k or so for your closing costs.  They have a chart showing the different rates, and rebate/credit amount

Nate Burnett · Answer

@Zack Karp, I was undere the impression that once it hit 78% of the value the lender had to remove it, even from an FHA mortgage, is that not the case? I was reading similar links to the ones below. And so are you suggesting that by lender credit, something similar to a 203k Streamline?

http://mymortgageinsider.com/how-to-get-rid-of-mor...

FHA + Owner Finance to avoid PMI?

Most Popular Reply