FHA Plus Loan with Mortgage Credit

[Gabrielle E.]

I'm considering using an VHDA FHA Plus loan and obtaining a VHDA Mortgage Credit Certificate to purchase my first owner occupied investment property. What are you thoughts on this strategy for purchasing a property between 100-135k? Would it be advantageous to save my cash and use other people's money or should I pay 3.5-5% out of pocket?

FHA Plus info:

This VHDA-financed FHA-insured home loan includes a second mortgage designed to help qualified borrowers who need down payment and closing costs assistance.

Borrower(s) must have cash available equal to a minimum of 1% of the sales price.

Second mortgage – 3.5% to 5% of sales price.

Maximum second mortgage 3.5% for qualified borrowers with a 620 – 679 credit score or 5.0% for qualified borrowers with a 680 or greater credit score. The maximum second mortgage is based on the lower of sales price or appraised value.

The 30-year fixed interest rate for the first and second (both VHDA-financed) mortgage is slightly higher than our standard fixed rate programs.

Mortgage Credit Certificate Info:

If you're buying your first home, a Mortgage Credit Certificate (MCC) from VHDA could save you thousands of dollars by reducing the amount of federal income tax you owe.

Unlike an income tax deduction, an MCC is a dollar-for-dollar credit against your federal income tax liability:

• The credit is equal to 20 percent of the annual mortgage interest you pay.
• The remaining 80 percent may still be taken as a tax deduction.
• The MCC is effective for the life of your mortgage, as long as you live in the home.

Thanks for the advice and help BP!

[Scott Hollister]

Hello Gabrielle,

Congrats on going after your first owner occupied investment. I am always thinking ahead, and my question is about the 2nd mortgage. What happens when you want to get another property(If you do) and your LTV on this property is high, will that hurt your chances to obtain financing?

In my experience, I got my first owner occupied "duplex" 3.5 years ago with 3.5% down. I paid extra towards the principal, even profits the entire time. I just recently took a 2nd on this one to buy another with the BRRRR strategy. My personal philosophy is to use 2nds to "make money". Ive seen first hand how dangerous they are when people buy toys.  

So my advice would be to use the money you have (don't pay interest like you do when you use OPM) Pay yourself that 20% credit. But then again, you have to assess your risk tolerance. If that was going to leave you short, prepare a cap ex/maintenance account for your properties. 

Or....

Use the down payment assistance, take the credit, and pay down 2nd while using the profits to pay it off quickly, then principle. That way you can take another 2nd and roll it into another property. (Unless you can find somewhere to get a better return on your cash)