Refinancing out of FHA after 1 year (house hack)

[Edgar Perez]

Hey BP,

I am looking into purchasing a $170,000 duplex using an FHA loan and house hacking. The duplex is a bank foreclosed REO and I think the asking price is about where the home is valued at. It is located in a nicer part of town, each unit has 3 bed 1.5 bath located on a corner lot. There is not a lot of work that needs to be done to the home, it had to undergo mold remediation but that part is done. Aside from some dry wall, minor flooring and kitchen update the place is solid.

I am pre-approved for the FHA so that is not a problem, my concern is on the Refi. Ideally I would like to cash out refi after a year to get rid of the PMI on the loan and pull out some cash but I am not sure how a refi works.

What do they base the refi off of?  

---I have excellent credit, and a decent savings (after the first year I estimate around 20k in savings) my W2 job brings in 3k a month gross and I think I can get a min rent of 1100 from one side of the rental, estimated monthly mortgage payment under FHA would be about $1000 (not including taxes and property insurance). Any info would be much appreciated. Thanks BP

[Letxy Sosa]

You need to be at an 80% loan to value ratio to be able to refinance into a conventional loan without a PMI. I recommend you put in extra money every month towards your principle and check to see where your property value and loan balance is in one year.

[Devin Deswert]

FHA loans are also typically a little bit more expensive on the closing side. Then refi fees if applicable.

But why even do a cash out refi? What's the goal? Or is it because everyone tells you it's the way to go? While chanting the whole other people's money thing?

Let's recap what you are doing and the two options:

Buying a duplex for 170k valued at 170k and on top of payments you can come up with a extra 20k. While doing so you will be living rent free according to your numbers. I don't know the fees so will have to go simple and not about to do a full pro forma either.

Option 1 :

3.5% down for FHA let's call this 6k down plus roughly 6k paid in on the loan though payments. This puts you around 7% LTV then add in your 20k that puts you at 19% LTV. So even if something crazy happened and you saw no vacancy, no maintance, and saw a 10% appreciation in Wisconsin. You could in theory pull out 9% of the value for a total of 15k. Still that's not including all the fees associated with lending. Not to mention what that 15k really cost you at whatever interest rate over 30 years.

Option 2 : sit back and enjoy being a landlord for a couple years, improve the property to limit maintenance for when you are not living rent free or position it for sale/1031 X. Keep your saved 20k for the next property or use it to invest with a partner or solo from the safety of your low cost of living. Plan for a 2-3 year time line I would say before this duplex is ready for a cash out refi.

But thats my opinion. Also I don't know all the numbers, your goals, home life and my investment views lean more to the conservative side to what's typical of the broader bigger pockets base.

[Edgar Perez]

@Devin Deswert you bring up a very valid point; my plan is to try to refi out of the FHA for 2 main reasons. 1 get rid of the pmi and 2, and my real motivator for doing so, is to get out of the FHA loan for this house and use it for another property. This way I can then rent out the other side of the duplex and house hack another property.

[Zack Karp]

@Edgar Perez

This is the part of my job that I love.  Helping investors see 2,3,4 moves ahead so that you don't get stuck, and making sure they get the best terms for their situation (which is not always the lowest rate, contrary to popular belief).  There is some creativity and strategy involved.

The strategies around the house hack, and the exit refi, are something that many loan officers either don't understand, or simply don't care to put you in the best position. The FHA purchase should be structured in a way so that you get a large lender credit for a higher interest rate. If you know going into this that you are going to refi in a year, I can show you the math where it makes total sense and this will save you thousands of dollars.

Then there's part 2, the refi. Everything is going to depend on the appraised value of the home. If you are trying to get out of the FHA loan and into Conventional to get rid of PMI, you will need to be at 80% LTV (the max loan would be 80% of the appraised value). For cash out, you can get a max loan up to 80% LTV if this is your primary residence, or 75% LTV if you are converting it to an investment property. Since you said you are trying to free up your FHA loan to house hack again, make sure you know your ARV numbers so that you don't get stuck.

And make sure you are working with a rockstar LO that is looking out for your best interests, and a lender that is investor-friendly.  The wrong one will give you nothing but headaches and hurt your bottom line, and the right one will set you up for long term success and grow with you.

Best of luck!

[Shawn Crawley]

Zack Karp By your response you seem very knowledgeable. I just got qualified the other day for FHA loan. My idea is pretty much the same house hack and refi or or atleast be in position to setup my next move. Would love to ask a few questions

[Zack Karp]

@Shawn Crawley ask away! If you just got prequalified the other day for a FHA loan, and you still have questions, you must not be working with the right loan officer. I'm not licensed in Virginia, but if you need a referral to a rockstar LO there, let me know and I can connect you.

[Shawn Crawley]

@Zack Karp I went through a mortgage broker and I haven't actually spoken to the LO

[Justin Nagy]

@Zack Karp Can you refer a rockstar LO in St. Louis Missouri?

[John Ching]

Originally posted by @Justin Nagy:

@Zack Karp Can you refer a rockstar LO in St. Louis Missouri?

 Justin, if Zack cannot help you out, I know several here in Springfield, MO that can help you. 

[Brent Coombs]

Originally posted by @Zack Karp:

@Edgar Perez

This is the part of my job that I love.  Helping investors see 2,3,4 moves ahead so that you don't get stuck, and making sure they get the best terms for their situation (which is not always the lowest rate, contrary to popular belief).  There is some creativity and strategy involved.

The strategies around the house hack, and the exit refi, are something that many loan officers either don't understand, or simply don't care to put you in the best position. The FHA purchase should be structured in a way so that you get a large lender credit for a higher interest rate. If you know going into this that you are going to refi in a year, I can show you the math where it makes total sense and this will save you thousands of dollars.

Then there's part 2, the refi. Everything is going to depend on the appraised value of the home. If you are trying to get out of the FHA loan and into Conventional to get rid of PMI, you will need to be at 80% LTV (the max loan would be 80% of the appraised value). For cash out, you can get a max loan up to 80% LTV if this is your primary residence, or 75% LTV if you are converting it to an investment property. Since you said you are trying to free up your FHA loan to house hack again, make sure you know your ARV numbers so that you don't get stuck.

And make sure you are working with a rockstar LO that is looking out for your best interests, and a lender that is investor-friendly.  The wrong one will give you nothing but headaches and hurt your bottom line, and the right one will set you up for long term success and grow with you.

Best of luck!

..."get a large lender credit for a higher interest rate"? Smacks to me of dodgy guru-speak. [What's THAT about?]

"If you know going into this that you are going to refi in a year"...? But, what if you, then, can't refi?

"75% LTV if you are converting it to an investment property". But not if you agree to live there for another year, right?

Mainly, I reckon you should be emphasizing how SUPER-hard it is to get to the required 20-25% equity - in just one year!

[Kevin Romines]

What Zack was referring to on the lender credit was a credit toward closing costs. So if you were planning on putting 3.5% down payment and then also paying your closing costs, you might be better off taking a high enough rate to get the lender to cover all your closing costs and instead of using part of your money to cover closing costs, you now have enough money to put 5.5 - 7% down on the loan. This reduces your payoff, increases your equity position and makes it easier to hit the equity position you will need to hit at the time of the refinance. 

And because you had the loan for such a short period of time before you refinanced it, you have a lower balance with a little higher monthly payment. So in the end, you put more of your money to use correctly versus into closing costs. Its all about planning and executing the plan. 

[Brent Coombs]

@Kevin Romines, thanks for that explanation. However, as a strategy, too many "if"s and "might"s for my liking...

[Kevin Romines]

@Brent Coombs I agree with you Brent. I tend to be conservative and try to mitigate the risks as much as possible. I guess that's my previous back ground as an insurance agent talking, lol. 

For me, I wouldn't be opposed to going down the path of planning a 1 year refinance, but I would want to see my borrower planning on forcing appreciation by doing a bit of a rehab or an addition possibly. Also because I have wholesaled many times in the past, its not hard to see when someone is buying at distressed prices, so if the equity position looked to be there at the time of the purchase, or close to there, then I could see myself helping a client structure a deal in that way at that point. 

But to hope that values will come up without some mechanism to help force the value up, is not a wise position to take. 

[Zack Karp]

@Brent Coombs these are next-level strategies that your cookie-cutter LO/lender doesn't take the time, or may not even understand.  Sure, there are risks and what-ifs for every scenario.  The key comment in my post was to know your numbers so you don't get stuck.  But when someone intends to purchase and then refi in a year, assuming they know their numbers going in, then this is a simple math problem that many investors don't even consider or know about.

Follow me here, I'll walk you through it.

For example (I'm not using real numbers here), let's say you are buying a home for $200K using FHA financing, $193K loan amount ($196,377 with UFMIP), and the going rate is 4.0%. Instead of taking that rate of 4%, the lender can give the buyer a rate of 4.5%. This may allow a lender credit of 2% of the loan amount. That would be a lender credit of $3,927, which would be a direct reduction of cash to close. Now the mortgage payment would be $57.47 higher per month. So in 12 months, the buyer would pay $689 more in monthly payments, in exchange for a $3,927 closing cost credit.

Who in their right mind would not take $3,927 for $689?

So to your point Brent, what if?  What if they couldn't refinance for 2 years instead of 1?  Then they would pay $1,379 more in payments over 2 years.  And still get that same $3,927.  Again, who wouldn't do that?

In fact, in this scenario, the buyer doesn't break even for 68 months (5 years, 8 months) by taking that lower interest rate. If that investor can't refi out of FHA and into Conventional for 5 years and 8 months, then they didn't know their numbers, or some life event happened or the economy crashed again, and a 0.5% interest rate difference is the least of their problems.

So many people get caught up on rate, when in fact there are so many other factors that should be considered.  True cost and benefits trumps rate every time.

My point is that if you aren't using a LO who is exposing you to all of your options, not setting you up for future success, or only selling you on having the lowest rate, then you may be using the wrong LO and leaving money on the table or worse, getting stuck.

[Brent Coombs]

@Zack Karp, yeah, that all sounds fine, if it's a genuine 2% lender credit on the loan amount. Thanks for taking the time to go through that. My main focus has been to recommend: Offer the Seller less to begin with! 

That way, you should be looking to achieve much MORE than the extra 2% equity that you're talking about, on day one. THAT's what will help quicken the refinancing availability! Cheers...

[Zack Karp]

@Brent Coombs frankly that credit can be as big or small as your appetite allows (it does cap at a certain point, and the credit cannot exceed the actual costs and prepaids).  In that same example, what if you took a 5% rate and got a 4% lender credit?  So then you get a $7,854 credit, and in 1 year that credit only costed you $1,379 in higher monthly payments.

You just pocketed an extra $6,475!  On top of offering the seller less...

My point is, did your LO ever tell you that you could do that?  I'm guessing most investors here don't have a LO looking out for them in that way.