FHA vs. Conventional on First Investment Property

7 Replies

Hey BP Community! I am about to put an offer on a property, and I am trying to figure out if I should go with an FHA or Conventional Loan for my finance option. I currently do not have a mortgage, and am looking to purchase this property as a rental. It has 3 buildings on it that can be rented out, and I am considering doing one as an AirBnB. This would be my first time buying, and I am wondering if I can use the Florida First-Time Buyer Program for these intentions. Also, there is some potential issues with the property survey that show the current home's driveway on the neighbor's property. This hasn't been an issue in the past for the current Owner since it is her brother's property. Can I still receive an FHA loan with an "issue" like this? Basically, I want to make sure I get the best bang for my buck on my first investment property! Any help is greatly appreciated!

From a past biggerpockets article. https://www.biggerpockets.com/renewsblog/2015/03/25/fha-financed-duplex-ideal-first-investment-property/

Thank you @Andrew Hoelzel that article is a good, helpful read about FHA loans.

I think I need to rephrase my post. It's actually my boyfriend buying the property, so we are researching this for him. We are not using an agent, and the seller's agent has mentioned that he doesn't think we will be able to get government financing because of the lack of legal ingress/egress onto the property. Like I said, the current owner and previous tenants have used their driveway which cuts across the neighbors property. Does anyone have insight on whether this is something that would disallow us to get FHA loans?

Additionally, we don't plan on living in any of the units. Because of this, we don't think we'll be able to get owner-occupant financing on the property. We are wondering if we could find a loophole to that (in order to put less than 15% down) because his current "primary residence" is my house. He could switch his "primary residence" to one of the units on the property and use it as an Air BNB, maybe even actually staying there sometimes. How do the lenders know if it is your primary residence? We aren't trying to be schisty, just trying to find out if there's a legal way to work around this. If not, not problem, he will throw the 15-20% down.

Congrats on your first transaction.  Let me offer you some thoughts.

FHA loans that offer the standard 3.5% down payment option are for owner occupants only. Owner occupants are required to live in the property for at least 12 months, and certify under penalty that they will do just that. What you do after the 12 months is up to you. However, these initial 12 months are required in order to be compliant with the terms of the loan. This is not a technicality, this is an absolution. You can go to jail for loan fraud if FHA discovers that you are not living in the property for the initial 12 months.

The same is true for most, if not all of the first time home buyer programs.  In fact, some of those that offer down payment assistance will often times require more than a 1 year commitment....many of them 3 years.

It will not be possible for him to utilize FHA or even a conventional loan product intended for fist time home buyers to purchase an investment property. They all have occupancy requirements for the owner.

Best just to save up for the down payment. Look into HomePath in your area.  They offer a 10% down investment program for the first 4 properties.  The purchase has to be one of the HomePath homes, if any are available in your area.  The program is slim now that short sales aren't so rampant, but there are a few still out there.

Also, regarding the cloud on title (which is what the egress issue is considered), this is a big issue REGARDLESS of your financing.  Things seem friendly now because the infringed property is related to the Seller, but what happens when he sells his property and the new owner says "no way".  Then you have a big problem.  Get that resolved BEFORE pursuing it.  The Seller needs to have a clear resolution.  If she is related to the neighbor then it may be a simple CC&R or deed restriction added that they both agree to that grants an easement for the property you are looking for.  Either way, I would get that resolved before even considering a property.

Best of luck to you!

@Cara Lonsdale this is immensely helpful! Thank you! I thought your first few points about FHA/conventional and first time buyer loans was true, but just wanted a confirmation. He has more than enough for a down payment, we were just trying to leverage as much as possible. He will do the 20% down.

As far as the easement, I completely understand. The purchase price reflects the risk/concern. The plan, if things go south with the neighbor, or even if they don't when we get the time to, is to build a driveway from the easement that is on the back side of the property. I'm interested in the CC&R or deed restriction possibility though. How do you go about getting that?

@Thea Linkfield as @Cara Lonsdale stated, FHA is for owner occupied only. So is the down payment assistance (DPA) loans you were talking about. If you want that then, you have to live in the property for at least 1 yr. Many DPA loans have an even longer requirement.

Being that this purchase has 3 units, it will be 25% down (not 20% down) for a conventional Fannie/Freddie loan.

Upen Patel, Lender in (#National Lender NMLS 1374243)
(571) 331-5161

Good job in doing in finding driveway issue before closing.
Personally I would like to get it resolved before closing, if the owners are siblings it will be easier for them to resolve it then it is for you, assuming they have a good relationship.
Don’t assume after closing neighbor will do the same as w previous owner. If that driveway is only way to park your cars in your property I would look for a resolution before closing..
As other members stated w FHA loan you will have to live in property..

Originally posted by @Thea Linkfield :

@Cara Lonsdale this is immensely helpful! Thank you! I thought your first few points about FHA/conventional and first time buyer loans was true, but just wanted a confirmation. He has more than enough for a down payment, we were just trying to leverage as much as possible. He will do the 20% down.

As far as the easement, I completely understand. The purchase price reflects the risk/concern. The plan, if things go south with the neighbor, or even if they don't when we get the time to, is to build a driveway from the easement that is on the back side of the property. I'm interested in the CC&R or deed restriction possibility though. How do you go about getting that?

@Thea Linkfield make sure that you have the plan (whatever it is) CLEARED before you sign on the dotted line. You can get CC&Rs from the HOA, the Seller, or the title company. You may have to pay a fee to get them, but it will be worth it to obtain the info and evaluate your options.

Again, I want to make very clear.... Whatever arrangement you have or want to have with the neighbor, get it in writing BEFORE you close so that it can be recorded with the deed, or at least documented.  Otherwise, you may find that after closing, the neighbor suddenly refuses to cooperate or holds his hand out for money to work with you.  That would be unfortunate, but it happens all the time.

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