Why FHA Financing Doesn't Always Work In High Cost Area's........

[Jerry Padilla]

FHA is a great product when you are able to use it......

There is a lot of criteria that must be met with FHA that many investors are not aware of.........

Many times, investors find this criteria out the hard way, when the loan is denied.

FHA Financing Allows A Maximum of 4 Financed Properties To qualify (Including investments) & subject!

This is an Owner Occupied Mortgage Product, Requiring You To Live In The Property For 1 Year!

The maximum mortgage amount for 3-4 unit properties is limited, so that the ratio of the monthly mortgage payment, divided by the monthly net rental income does not exceed 100%, regardless of the occupancy status. This is also taking into consideration, a 25% vacancy factor. (This poses a problem especially in high cost areas)

• To overcome this you may have to increase your down payment to allow for this ratio. The down payment will depend on the ratio for market rents and your mortgage.
• In high cost areas, you may only be able to go up to a duplex with an FHA Mortgage as this criteria, only applies to 3-4 units.
• FHA also limits you to a total of 7 units including subject property and all other rental property......... So if you start out with purchasing rental property, you may exceed the allowable number of total units to go the route of FHA.

• A common misconception that I frequently see; You can purchase with an FHA Mortgage, hold the property, and then refinance with conventional and repeat......... (If only it were that easy)
• FHA is not meant to be a cheap way for investors to get into financing with a low down payment. It is designed to get primary home buyers into a property with a low down payment.
• That being said; If you start out by purchasing a primary 4 unit with an FHA Mortgage (here is your 4 units towards the 7 max allowed) You put a little sweat equity into it over a year period, you then refinance with conventional and have a 75% LTV, with a conventional. You are already limited to 3 units or less. In addition,
• Underwriters are going to see that you are departing your primary residence. They are most likely, going to question why you are purchasing another multi-family residence as a primary residence, (especially if you are trying to go up in the number of units, maybe you could win if your new unit will be much larger than your previous unit) If you are going to now purchase a SFR, it isn't going to be much of a problem granted you meet the above criteria, as it appears you are moving from a MFR to a SFR and more of a potential permanent situation. FHA also limits you to a total of 7 units including subject property and all other rental property.
• The Only Exceptions To Qualifying For A Second FHA Mortgage At One Time!
• Relocation- Must be greater than 100 miles from current residence.
• Increase In Legal Dependents - The current property must no longer meet the family needs. The current departing residence is required to have an LTV of 75% as determined by current balance as well as a current appraisal.
• Vacating A Jointly Owned Property - The departing residence must be occupied by other owner with no intent of returning - such as divorce or legal separation.
• Non-Occupying Co-Borrower - If they are now going to be the primary occupying borrower, now.

Here is a list of some of the high cost areas;

These California cities are in the High Cost areas for 2015;

Los Angeles, Anaheim, Long Beach, San Jose, Sunnyvale, Santa Clara, San Francisco, Oakland, Hayward, Santa Barbara, Santa Maria, Santa Cruz, Watsonville

The CA counties are included in the high cost areas;

Alameda, Contra Costa, Los Angeles, Marin, Orange, San Benito, San Francisco, San Mateo, Santa Barbara, Santa Clara, Santa Cruz

These Colorado cities are in the High Cost areas for 2015;

Edwards, Glenwood Springs, Steamboat Springs, Breckinridge

The CO counties are included in the high cost areas;

Eagle, Garfield, Pitkin, Routt, San Miguel

Washington and Arlington - District of Columbia

These Hawaii cities are in the High Cost areas for 2015;

Kahului, Wailuku, Lahaina

The HI counties are included in the high cost areas;

Honolulu, Maui, Kalawao, Kauai

These Idaho cities are in the High Cost areas for 2015; Bailey, Hailey

The ID counties are included in the high cost areas; Blaine, Camas, Lincoln, Teton

The NY NJ PA counties are included in the high cost areas;

Bergen, Essex, Hudson, Hunterdon, Middlesex, Monmouth, Morris, Ocean, Passaic, Somerset, Sussex, Union, Bronx, Dutchess, Kings, Nassau, New York, Orange, Putnam, Queens, Richmond, Rockland, Suffolk, Westchester

These New York, New Jersey, Pennsylvania cities are in the High Cost areas for 2015;

Jersey City, Newark, New York

Elizabeth City in NC with counties of Camden, Pasquotank, Perquimans

In DC, VA, MD, WV - Washington, Arlington, and Alexandria

In MA - Vineyard Haven - Dukes and Nantucket

Always Feel Free To Reach Out With Questions.