Is an FHA Loan realistic for me?

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Is an FHA Loan realistic for me?

Account Closed
Wholesaler · Salt Lake City, UT · Member since 2016 · 13 posts · 1 vote

I'm a single 32 y-o with a full time job living in Los Angeles. I was a freelancer up until one year ago. Now for the past year I've been working for a company full-time, and my NET annual income is about $36000. As of now I only have around $2000 in savings (thanks to some costly life events and high LA rent!)

I have good credit, around 760, and a full time job, but my salary is low. I never thought I'd ever be able to buy a home, but now I've just learned about FHA loans and I'm so excited about this new prospect of being able to buy a piece of real estate and stop burning my money on rent every month!! My question is though, is my low salary going to prevent me from getting an FHA loan? I'd also have to get creative for how to come up with the 3.5% but I'm not even at that point yet. I'm just trying to figure out if I could even get a loan like this first.

I would be interested in buying a duplex, triplex or fourplex and living in one for the first year. And then after that, perhaps repeating the process. I'd really like to build a portfolio. I'm very interested in owning multiple properties and generating as much passive income as possible. Of course the idea of being able to live with cheap/free rent while someone else is paying my mortgage is so great in itself too. 

I'm still learning real estate math (I also work as a property manager at a commercial real estate firm so I have some knowledge on bookkeeping, etc) but I'm not good enough yet to determine if getting an FHA loan to get a $1,000,000 fourplex in Los Angeles (or surrounding area) is going to kill me. The rule that says you shouldn't take out a loan that's more than 3x your annual income makes me think it's not even possible for me since my income is so low. But does that only apply if you're buying a single family home to live in or does it apply to a multi-family that you want to live in too?

Since I'd have to live in the property, it kind of restricts how far away from LA I can buy. I also don't want to buy something cheap in a bad part of town and have to fear for my life. This makes things a little harder as well.

If anyone has any input on my situation that would be great - is this realistic for me? Do I have a way to somehow get property that I could live in and have it be at least $100 cash flow positive? 

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Manolo D.
Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
10y

I don't think being picky is the right time, everything you restrict is a trade off, if you want a good neighborhood, it's expensive, if you go closer to downtown, more expensive, more outskirts of LA less expensive. If you're income is 36k net, your hourly rate might be somewhere between 20-23/hr, which puts you at 40-45k, when doing a loan, they compute around 40-45% to be your mortgage, with that figure, they need to deduct your regular monthly expenses, IE credit card average etc. Say at 3500/mo, 40% of that is 1,400. Even if you don't have credit card monthly expenses, or car loans, and with 3.5% down, the house might need to be at 200k. That is what my banker explained to me, I am not a loan expert but I think that is how they compute it.

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  • Manolo D.
    Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
    10y

    I don't think being picky is the right time, everything you restrict is a trade off, if you want a good neighborhood, it's expensive, if you go closer to downtown, more expensive, more outskirts of LA less expensive. If you're income is 36k net, your hourly rate might be somewhere between 20-23/hr, which puts you at 40-45k, when doing a loan, they compute around 40-45% to be your mortgage, with that figure, they need to deduct your regular monthly expenses, IE credit card average etc. Say at 3500/mo, 40% of that is 1,400. Even if you don't have credit card monthly expenses, or car loans, and with 3.5% down, the house might need to be at 200k. That is what my banker explained to me, I am not a loan expert but I think that is how they compute it.

    1Reply
  • Account Closed
    OP
    Wholesaler · Salt Lake City, UT · Member since 2016 · 13 posts · 1 vote
    10y

    @Manolo D. Thanks for your input! That is what I was afraid of. I'm still learning about the loans but I kind of figured I wouldn't be able to go all the way to the loan limit (which is what, 1.2 million for a fourplex I think). But $200k seems to be completely unattainable in LA. I don't want to come off as "picky" I only meant to add in that I have to at least somewhat consider location when buying something since I have to live in it (ie I can't buy in Vegas and don't really want to live in Compton if I don't have to). That being said, your answer makes it seem like ANY location in Los Angeles or even an hour out is totally unrealistic. 

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  • Manolo D.
    Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
    10y

    @Account Closed Unrealistic is really not a word I am fan of, maybe improbable but not impossible. Your best chance is a 4 plex, income you'll get from the other 3 units will come into play I believe, it is called self sustaining or whatever. But from what I gather, if you have rental income on 3 units and maybe plus a room or 2 on the unit you'll be living in, with all that gathered or factored in, there is still hope, I am still unsure how you will get to 5-7% of 1.2M, you'll probably need to pay other expenses aside from the 3.5% down.

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  • Account Closed
    OP
    Wholesaler · Salt Lake City, UT · Member since 2016 · 13 posts · 1 vote
    10y

    Hi @Manolo D., thank you for that extra tip and encouragement. It's very much appreciated!

    0Reply
  • Purnell C.
    Residential Real Estate Agent · Livermore, CA · Member since 2010 · 140 posts · 28 votes
    10y

    Hello @Account Closed, 

    Look into the down payment assistance programs for Ca. CA down payment assistance

    0Reply
  • Tim Puffer
    Lansing, MI · Member since 2015 · 301 posts · 149 votes
    10y

    With an FHA loan you will be able to use 75% of the income of the other units toward your income. They will likely look at what the market rents are and take an average.

    $1,000,000 for a 4-plex?! Wow, that's nuts.

    1Reply
  • Account Closed
    OP
    Wholesaler · Salt Lake City, UT · Member since 2016 · 13 posts · 1 vote
    10y

    @Tim Puffer I know, prices are crazy here. Thank you for that info! I have to look into that and see if that would make things a little more reachable!

    0Reply
  • Account Closed
    OP
    Wholesaler · Salt Lake City, UT · Member since 2016 · 13 posts · 1 vote
    10y

    @Purnell C. I will, thank you!

    0Reply
  • David Varvaro
    Lender · Hermosa Beach, CA · Member since 2015 · 70 posts · 32 votes
    10y

    Hi @Account Closed I think the best thing to do is talk to a lender who can explain different options to you but what @Manolo D said is pretty spot on. I can refer you a great lender if you want to PM me.

    I wouldn't look at paying for rent as throwing away money. You are paying for a place to live.  If you lived in another part of the country where your mortgage would be close to what you would be paying in rent then it would make more sense to own. But in Southern California, that's not the case. You might want to read Rich Dad, Poor Dad for a different perspective on owning the property you live in. 

    With that said, there are opportunities for you to buy a property but if you are looking for a MF it is either going to be in a rougher part of town or on the outskirts of LA (Antelope Valley, Inland Empire). 

    Another option is to buy a condo in an up and coming area and rent one of your bedrooms out to help pay your mortgage. In a few years you can use the appreciation (if you buy right) to pull out money to use as the down payment to buy your next property and then rent the condo out. This can be a significant amount that can help you move up to your next property. Then in a few years you can then repeat the process all over again. This is a long term strategy that many people use to acquire multiple properties. Check out Brandon Turner's BRRRR strategy for an idea of how to do it.

    1Reply
  • Ciprian L.
    Real Estate Agent · Burbank, CA · Member since 2012 · 271 posts · 79 votes
    10y

    @Account Closed. I used an FHA loan to purchase a duplex 2 years ago in Burbank, it wasn't easy, it's very hard to compete with conventional financing or cash offers, you will always be the last option for the seller.

    The first step would be to talk to some banks and see how much you can afford to buy. With 36k in income and 2k in savings it will be very hard to buy something in LA area. 

    With FHA you will have to pay the Mortgage insurance also, which I think now it's 0.85% from the loan amount. You also need reserves in case you have some maintenance or vacancies. As a landlord you will have to pay for water and probably for a gardener.

    0Reply
  • Fay Chen
    Investor · Bothell, WA · Member since 2015 · 214 posts · 104 votes
    10y

    @Logan Allec made a handy spreadsheet that does a bunch of calculations on purchasing multifamily using FHA. Not sure where to get it, but you can probably message him.

    0Reply
  • Account Closed
    OP
    Wholesaler · Salt Lake City, UT · Member since 2016 · 13 posts · 1 vote
    10y

    @David Varvaro My rent is currently at $1600 and is set to increase again in September so I definitely feel like I could be putting that towards a mortgage that i split with a few other tenants instead right? I do need to read that book! And I'm really open to taking every area into consideration as long as I'm able to still commute to my job. The condo suggestion sounds great, thank you for bringing that up! I've read a bit about BRRR but also heard that it's really hard to refinance if you have an FHA. Is that true? I still have a lot more reading to do on that. Thank you again so much for your input, I appreciate the tips!

    @Ciprian L. The competition is a big part of what scares me as well, but I have seen quite a few listings that specifically mention the properties are good for FHA loans. If something has that verbiage, could that actually make things a bit easier for me? Does that mean that the prefer an FHA to all cash or conventional financing?

    @Fay Chen Thank you! I'll search around for it :)

    I also did some more research today and it seems like I can also use the income of a co-signer in addition to my own and that could help me show an overall higher income and get a bigger loan. Does anyone have any insight on that? 

    0Reply
  • Shaun Weekes
    Loan Officer / Processor / Life & Health Agent · Rancho Cucamonga, CA · Member since 2014 · 1k+ posts · 757 votes
    10y

    @Shannon Browing

    You can get you down payment from a gift from a direct relative. Brother, sister or parent.

    You can use 85% of the current lease agreement towards your income.Conventional is 75%

    In LA and other high priced areas, it's really imperative that you find something that doesn't have rent control. This way rent can be raised at a reasonable amount every year.

    You can make this happen just make sure you align yourself with someone who knows what they're doing and has the experience to help you move forward with more loans in the future.

    1Reply
  • Ciprian L.
    Real Estate Agent · Burbank, CA · Member since 2012 · 271 posts · 79 votes
    10y

    When they say that the properties are good for FHA loan, usually it means that the property condition is good enough to qualify for FHA loans, which are more restrictive than conventional loans.

    0Reply
  • David Varvaro
    Lender · Hermosa Beach, CA · Member since 2015 · 70 posts · 32 votes
    10y

    @Account Closed Once you build up enough equity, it won't be hard to refi. The way the market has been moving out here, I've seen prices in some of the up and coming areas jump significantly that this could happen in a very short period of time (maybe 1 to 2 years but NEVER bank on it).

    Best bet for all your lending questions is to talk to a lender. This way you know exactly what you can afford and what your options are. Then you can decide what route you want to take.

    0Reply
  • RJ Walz
    Real Estate Professional · San Diego, CA · Member since 2015 · 6 posts · 2 votes
    10y

    Hi @Account Closed, I think it's awesome that you're exploring this. Like others on this thread have said, the best first step is to find a loan officer who is very experienced in making FHA loans and have him or her prequalify you. Your loan officer will collect all of your income/expense/asset/liability information, run your credit, and tell you exactly what you qualify for.

    If you're not meeting certain criteria, the loan officer can also tell you what more you need in order to qualify. You can also ask your loan officer questions like, "in order to qualify for an FHA loan to purchase a duplex of $300,000, what would my income and savings need to be based on my current liabilities and credit score?". Your loan officer can run scenarios like these for you. The goal of all of this is to get prequalified for a realistic dollar amount so that you can start making offers on properties.

    You also need to learn about how FHA financing works. There are a bunch of threads on BiggerPockets explaining FHA so definitely check those out. Most importantly though, you need to know that FHA has an extra rule for triplexes and fourplexes that does not apply to duplexes. For triplexes and fourplexes, FHA requires that 75% of the market rents at the property exceed the monthly principal, interest, taxes, and insurance. This is VERY difficult to satisfy in SoCal, so my recommendation would be to only look at duplexes. Duplexes do not have this extra rule and are treated just like single family homes by FHA. With duplexes, the only challenge with FHA is that that the property still needs to meet strict requirements as far as the condition (e.g. no peeling paint, no exposed live wiring, etc., etc.) Basically, you probably aren't going to qualify to buy a fixer upper with FHA, and your offer is going to be looked upon less favorably by sellers. If you're willing to put in the time though, you can make it work, and then you can own two units with 3.5% down. Can't beat that, but you also still need to make sure the numbers work.

    My recommendation is to get prequalified by a loan officer, figure out the geographic areas you're interested in, and start looking at duplexes. Good luck!

    1Reply
  • Account Closed
    OP
    Wholesaler · Salt Lake City, UT · Member since 2016 · 13 posts · 1 vote
    10y

    @RJ Walz @David Varvaro @Ciprian L. Thank you so much for these great answers! This is really helping me along as I formulate a game plan. Much appreciated.

    @Shaun Weekes Thanks for the tips! If I plan on trying to get gift money for the down payment, do I need to have that in my bank BEFORE I can get pre-approved? And if so, for how long does it have to be in my bank account for? And also, one thing I just can't figure out is...so I can use 85% of the lease agreement of the other half of a duplex I want towards my income to qualify for a bigger loan amount...but how does that help me during the pre-approval process when I haven't even found a place yet? 

    0Reply
  • Shaun Weekes
    Loan Officer / Processor / Life & Health Agent · Rancho Cucamonga, CA · Member since 2014 · 1k+ posts · 757 votes
    10y

    Gift funds don't have to be in your account but it would be easier if they were.

    Great question on the future rents.  You're going to need to guess at first what the median rent is in the area you're pursuing.  Your loan officer will be able to help with this as well typically your pre approval won't include future rents.

    0Reply
  • Deanna O.
    Rental Property Investor · San Diego, CA · Member since 2010 · 377 posts · 314 votes
    10y

    Paying $1600/mos in rent...have you considered BEING a roommate? Look for a month-to-month situation (so you can move once you find a place of your own), but also that will give you a better idea of if you could cope with renting rooms out too.

    (after 20+ years of roommate living I'd say that making sure everyone is on the same page is more important than the area or anything else. OK to live with a party crowd if you are also a partier,. OK to live with hermits if you are a "go to your room & avoid all human contact" sort of person yourself).

    0Reply
  • Account Closed
    OP
    Wholesaler · Salt Lake City, UT · Member since 2016 · 13 posts · 1 vote
    10y

    @Shaun Weekes Thank you!

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