So it's been almost a year since I bought my first property. I've been counting the days in anticipation of this event and I'm ready to start looking at a second property, or so I thought before talking to my broker..
Originally, the plan was to finance tree first duplex with an FHA loan, live in one side for a year and then look for another duplex afterwards, finance that with a similar loan, live there for one year, rinse and repeat, etc.
I knew that I'd eventually have to find another way to finance these deals, but I didn't think it would be before buying my second property!
According to my current broker 1) you can NOT have more than 1 FHA loan at a time. 2) Being that this is the second property for me, the terms wouldn't be that much different from a conventional loan anyways. 3) Being that a conventional loan is my best option and I do plan to live in the new home, if I want another duplex I would need 15% down, but if I want a single-family home, I only need 5%.
Maybe this person is 100% correct and this is the best option for me. Maybe they just don't have access to better deals. Maybe they're inexperienced in this area of financing and just don't know. I certainly don't know.
What do you think? Is this information accurate? Is there something else I should be asking? Any advice is appreciated!
@Tim Crosby Based on what you provided in your post, it doesn't sound like you would be eligible for an exception to have more than one FHA loan outstanding (though it is possible). Have you done any work on your current duplex? Wondering if you would have enough equity for a refinance into a conventional mortgage to make sense. If so, this might be a way to free up your FHA slot.
@Travis Henry no, we haven't done any work on the property. It was in pretty good shape when we bought it, in fact, that's why we bought it, because it was a less risky investment! Being that I've only been there a year, I'm pretty certain there's little equity.
However, I did just think of something else.. my broker and I spoke about 6 months ago just to discuss options and my wife was pregnant at the time. After looking more into this, I'm wondering if I can get some sort of deal for that considering we need more space?
Really, I'm most interested in getting that down payment number down. The other requirements of the FHA loan (central air, etc.) are already requirements in my mind. 5% is do-able for me, but 3.5% just sounds SO much better!! Anyway I can get that down is awesome!
@Tim Crosby Gotcha. Your growing family could definitely be an option for multiple FHA loans; however, I think there's also an LTV requirement to qualify for this exception (don't quote me on that). It seems like your best course of action would be to speak with a lender (or several) to determine what hoops you would need to jump through to qualify for an exception.
@Travis Henry , interesting. I'm actually about to talk to another broker here in a moment. What is an LTV requirement? Also, while I've got you, any other recommendations or ideas about how I can lower that down payment? Maybe there's another type of loan I'm not considering??
@Tim Crosby LTV is just another way of expressing the amount of equity in a financed property. For example, 75% LTV implies 25% equity. I don't know if there's a required LTV to qualify you for a second FHA with your growing family, but hopefully the broker you're speaking with will be able to clear that up! Good luck!
You can only have one FHA loan, unless there is extenuating circumstances. Those conventional down payments are correct. If you have built up enough equity in the property, to meet conventional LTV's than you can refinance and purchase with FHA. If you are increasing units from your previous property to the new property, the underwriter is going to question the purchase.
So, as an update, being that my current unit is so small, everyone I talked to was confident that a new baby would qualify me for a larger home with FHA, duplex or not. However, after talking about this issue more with my wife, we've decided that a better alternative for us might be something more conventional.
Rather than shopping for another duplex, we're instead going to look at a more permanent single-family home that we can build equity into. Sure, we might have to put up more money if it doesn't qualify for FHA, but we might also be able to acquire something with much greater upward potential.
The general idea is to buy a large home with 2 or 3 bedrooms, convert that to a 3 or 4 bedroom property and use that increased value down the road to help up get the 3rd property. It's basically the BRRRR strategy, without the renting part.. which leads to me to another question actually.. is that possible?
I'm not exactly sure how refinancing or the appraisal process works. For example, say I find a 3 bedropm home for 80,000 and I add a bedroom. How do I know how much value was gained? I assume an appraiser would tell me that. Does that automatically add equity, or do I need to refinance? Again, I assume that I do.. maybe I'm wrong, but if I'm not, how does that process work? What do I need to know or be ready for if I want to refinance a home I've done work on that I plan to stay in long term??
Also, thanks for all your help so far guys! If I need to move this to a different section or create a separate post, just let me know!!
Your agent when you buy the house can pull comps on properties with more bedrooms to give you an idea.
When the renovations are done, and you go to refinance, the house will be appraised at the current value.