VA vs FHA vs 203k - What would you advise?

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VA vs FHA vs 203k - What would you advise?

Rosy Bruno
Seattle, WA · Member since 2017 · 72 posts · 23 votes

Hi Everyone! I was hoping to get a little advice from those that have dealt with either a VA, FHA, or a 203K loan. I am currently looking at these to purchase a tri- or four-plex; I am looking for something that needs a little fixing up. I have some equity saved up from another SFR that I could use but I would prefer to leave that untapped (unless you think otherwise).

What are your experiences/thoughts on these financing options (any loopholes or regulations I should be aware of)? I do know about the cap for the VA loan and I believe we are still under that (still doing my research).

Thank you in advance for all of your help!!!!!! :D

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Michael Cohen
Investor · Towson, MD · Member since 2014 · 472 posts · 257 votes
9y
Rosy Bruno most renovation loans, including FHA 203k, forbid the buyer to do work themselves. In addition, the work must be completed with 60 days. So unfortunately you can't do a slow unit-by-unit rehab over the course of a year.
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  • Nick G.
    Investor · Moorpark, CA · Member since 2016 · 248 posts · 191 votes
    9y

    Hi @Rosy Bruno. All of those loans have caps, and those caps tend to all be the same or similar for those three loans, though what the caps are depends on your area as well as how many units the property has. A quick google search for what the 2017 numbers are will tell you.

    If you served in the military and have VA-entitlement, I think it's the best loan of the three. Takes a little longer to close and can be harder to get a seller to accept it when you have competition, but to you the borrower, not having PMI with 0% down is a simply massive boon for you and your cashflow.

    FHA and FHA 203(k) are both great too. FHA 203(k) is a pretty different animal simply because of how the disbursements for repairs and everything work. Depends on how much work the property needs, really. PMI is pricier on these loans, but the tradeoff is only 3.5% down and a low interest rate.

    All of three of those loans require you to live in one of the units for at least 12 months. Doing otherwise would generally constitute loan fraud, though there are exceptions if you need to move out a bit early for a valid reason.

    All three of these loans are pretty similarly easy to qualify for in terms of income and credit requirements.

    Hope some of that helps. :)

    1Reply
  • Rosy Bruno
    OP
    Seattle, WA · Member since 2017 · 72 posts · 23 votes
    9y

    @Nick G. Thank you so much for such a quick and detailed response. It all helped! I did give some thought to the whole PMI portion and wasn't thrilled with the idea (who would be though). And I do plan to house hack so the year requirement shouldn't be too difficult to abide by - this is when I plan to do most of the work, unit by unit.

    So then, if I decided to go with the VA loan option, I would need to either use some equity for the improvements or find other creative financing, correct?

    What do you think about using my equity as a down payment for a conventional loan? It would leave me less money for improvements and I would be more vested in the property... thoughts?

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  • Michael Cohen
    Investor · Towson, MD · Member since 2014 · 472 posts · 257 votes
    9y
    Rosy Bruno most renovation loans, including FHA 203k, forbid the buyer to do work themselves. In addition, the work must be completed with 60 days. So unfortunately you can't do a slow unit-by-unit rehab over the course of a year.
    4Reply
  • Rosy Bruno
    OP
    Seattle, WA · Member since 2017 · 72 posts · 23 votes
    9y

    @Michael Cohen

    Hi Michael, thank you for that info. I had no clue about not being able to do the work myself or the timeline. I had briefly seen something about it requiring contractors but have yet to come across it again during my research so thank you for clarifying.

    0Reply
  • Nick G.
    Investor · Moorpark, CA · Member since 2016 · 248 posts · 191 votes
    9y

    @Rosy Bruno No problem. Yes, the PMI is more expensive, but it's no longer absurdly more expensive than your average conventional PMI, the difference isn't all that much. Good plan with the house-hacking, though I agree the 203k isn't an option if you were planning to work on it yourself.

    Yes, if you used the VA loan, the idea is that you'd be able to take the down payment and use it for repairs.

    If you have a VA loan available to you, it's my opinion that you should hands-down, no-questions-asked (kidding about that part) be using it. It's the Christmas-miracle-God-send-hallelujah-unicorn of GSE-backed loans. Zero dollars down with no PMI? Are you kidding me, who came up with that?? It's such a rad loan, and one that veterans are utterly and completely deserving of at that. Your country thanks you and so will your cash flow.

    Keep your equity so you can maintain a lower principle residence payment, maybe use a HELOC to fund repairs if you need, or I guess a cash-out refi in the worst case scenario. Just my opinions.

    1Reply
  • Rosy Bruno
    OP
    Seattle, WA · Member since 2017 · 72 posts · 23 votes
    9y

    @Nick G. all good points and thoughts! Thanks again for the vast info. I'm feeling more and more like a VA is the way to go. I'll have to get with an advisor to see where my cap is and go from there I suppose.

    1Reply
  • Melissa Kirchhoff
    Ottawa, IL · Member since 2016 · 242 posts · 107 votes
    9y

    @Rosy Bruno - As an agent who works with a lot of FHA, USDA and VA loans, I'd like to add to this information that those must pass an appraisal inspection. Now the level of how strict those rules on vary appraiser to appraiser. In my area, we've had a couple of very severe nit pickers (one got rejected for peeling paint on a metal clothes line) and others frankly give anything the thumbs up. So who certain lenders use can really affect the results. I prefer certain lenders doing government issued loans for this reason, so my advice to you would be to try to get answers on that if you are looking to purchase something with either FHA or VA.

    Also, it's a good point on the 203k rehab loan. However, if you network or know some general contractors...

    Otherwise, if we were looking at all these on a level playing field (let's say buying something that just needs updating but would pass inspection) then I agree with @Nick G., in my experience, the VA is the unicorn of loans. Lots of benefits, super low APR in comparison, it's magical (as it should be!)

    1Reply
  • Melvin ListBusiness Member
    Lender · Tampa, FL · Member since 2016 · 1k+ posts · 381 votes
    9y

    @Rosy Bruno I would find a contractor and use the FHA 203K

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  • Rosy Bruno
    OP
    Seattle, WA · Member since 2017 · 72 posts · 23 votes
    9y
    Melissa Kirchhoff thank you for your insight. I had forgotten about the appraisal aspects so I'll be sure to ask when I'm looking for lenders. And maybe once I've met and networked with contractors I'll be able to use a 203k. I feel at this point I don't know enough about what to expect in costs that I'd rather hold off on paying people; and I don't really plan on doing structural changes. Just flooring, cabinets, bathrooms, basic things :)
    0Reply
  • Andrew Mugo
    Investor · Lansdowne, PA · Member since 2008 · 23 posts · 4 votes
    9y
    Originally posted by @Michael Cohen:

    "Rosy Bruno most renovation loans, including FHA 203k"

    Thanks for the advise, with regard to the FHA203, is there criteria with regard to how little work needs to be done to qualify? IE can you qualify if all that's needed is heavy TLC?

    2Reply
  • Kerry BairdPro Member
    Rental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
    9y

    Pitching my 2 cents in on the VA: when we bought our current light fixer 2 years ago, the VA was fairly strict on the condition of the property. The VA required there to be at least 5 years of "life" in the roof, as determined by the inspection. We had an outdated kitchen, which was not a problem.

    We also needed to show income, either military service obligation or that we had a firm job offer (or contract) in the same career that we had while in the military. This means we had to show success in the same career OR two years in a new career. We can go over the cap on the VA, with different costs above the cap, and we can use the VA to buy up to 4 units, with one of those owner occupied.

    1Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    9y
    Originally posted by @Rosy Bruno:

    Hi Everyone! I was hoping to get a little advice from those that have dealt with either a VA, FHA, or a 203K loan. I am currently looking at these to purchase a tri- or four-plex; I am looking for something that needs a little fixing up. I have some equity saved up from another SFR that I could use but I would prefer to leave that untapped (unless you think otherwise).

    What are your experiences/thoughts on these financing options (any loopholes or regulations I should be aware of)? I do know about the cap for the VA loan and I believe we are still under that (still doing my research).

    Thank you in advance for all of your help!!!!!! :D

    TLDR:

    1. VA if the property is below the SFR conforming loan limit (even if it's a 2-4 unit) or you have the 25% down on the difference, and do not need rental income to qualify. VA also is not a model match for "fixer uppers," as VA loans have the highest property/collateral standards of all the Agency loan programs.
    2. FHA if it's over the SFR loan limit for the area and/or you need rental income from the subject property to qualify.
    3. Conventional if you want to be a strong buyer that has a higher chance of the offer being accepted.
    4. FHA 203k if you absolutely must.

    Talk to a lender familiar with all of these programs. So one of the 203k-only shops, or a VA-only shop, would not be a good fit.

    1Reply
  • Perry Farella
    Lender · Chicago, IL · Member since 2016 · 189 posts · 153 votes
    9y

    Just to add some thoughts here as a 203k lender. There is a new VA loan that offers a Rehab dollar component to it. Meaning on a VA loan one can now borrow at least 35k extra over the needed loan size, to do rehab on a house that will not pass a VA appraiser inspection or just needs updating. Its still 100% financing too.

    You still need a general contractor doing the work as in a 203k but the condition of the house can be poor as long as the rehab dollars address all deficiencies. I would check with the local office of Prime Lending in your state. They are one of only a couple lenders who have rolled this VA Reno loan option out this year.

    1Reply
  • Rosy Bruno
    OP
    Seattle, WA · Member since 2017 · 72 posts · 23 votes
    9y

    @Perry Farella wow I had no clue!!! That's very exciting and ill definitely be sure to look into it, if not for this purchase, then for others! Thank you very much for the insight!

    0Reply
  • Andrea Valenzuela
    Pembroke Pines, FL · Member since 2017 · 4 posts · 1 vote
    9y

    Hi Rosy! I'm in the military myself (O2 in the FLARNG) and work as a real estate agent on the civilian side. A lot of the buyers I work with are military and using VA loans. What a lot of them don't know is that there IS a "VA Funding Fee" that is charged in lieu of the PMI. Just good additional info to consider when working your numbers :)

    http://www.knowva.ebenefits.va.gov/system/template...

    1Reply
  • Peter Pasternack
    Flipper · Atlanta, GA · Member since 2008 · 1 post · 2 votes
    9y

    Hi Rosy. I wanted to give you some additional information on the 203K renovation loans. The lender puts the renovation money in a separate account. They then send out an inspector to check and see if the work has been done. Once the work is done they usually do a check to you and the contractor for payment. Renovation loans can be a great tool to leverage your money.

    2Reply
  • Alf Penland
    Tucson, AZ · Member since 2017 · 24 posts · 48 votes
    9y

    Andrea is exactly right. There is a VA funding fee and depending on what type of service you were in determines your funding fee amount. I was National Guard and my funding fee on my first home purchase was roughly $4,000, which is in addition to normal closing costs. Active duty is less, but still around $2,000 or so. It may also depend on the value of the property, although I'm not certain of that.

    1Reply
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