Should I use an FHA loan or should I wait and save more ?

Question

Hello everyone,

I’m exploring the possibility of purchasing my first property with the intention of flipping it, and I’d appreciate your insights. I’m strongly considering an FHA loan since my cash reserves are currently limited. I’ve recently paid off some debt and am earning a decent income, but my savings are still modest and not yet substantial.

My plan is to use an FHA loan to acquire a decent property, claim it as my primary residence for a year, and then either sell it for a profit or potentially rent it out. I have a few questions about this approach:

1. Is it a viable strategy to use an FHA loan for a flip, given the requirement to live in the property for at least a year? Are there any pitfalls I should be aware of?

2. Can FHA loans be used to purchase properties needing significant renovations, or are they limited to homes in good condition? I’d like to understand the scope of repairs allowed under this financing option.

3. If an FHA loan isn’t ideal, I’m open to alternatives like a hard money loan. However, I’m concerned about the proof of capital requirement—would this typically demand a large amount of cash on hand, and if so, how much is generally expected?

I’m eager to hear your advice and experiences, especially from those who’ve financed similar projects. Any guidance on navigating these options as a first-time investor would be greatly appreciated!

Peter Mckernan · Answer

I would first look at not doing a flip at all until your cash reserves are saved up more. Flipping is not an easy and quick task that can be done with a little amount of money. There is a lot of calculations, market conditions, money, strategy, and more that go into each deal. I would save more prior to jumping in, even if it is a primary residence, this is because the rehab is always more than you calculated.

You can use an FHA 203K loan and the conventional construction loan to do your rehab, these take longer than you expect as well. Sometimes these purchases, or refinances take 2 times the length you would think, and sometimes 3-4 times. I have a client that did a conventional construction refi and it took him 7-8 months due to the city permits and all. You really need to have your ducks in a row when you do this because you are not only answering to a contractor, your HML, or you bank account by pulling funds out. These loans are more time consuming, challenging on documentation, and other red tape than you can think of to be honest.

I am 100% in on advocating for doing more rehabs and leveraging Fannie and Freddie guidelines to do it, but you need a lot more stuff on these loans that will take you longer to do that is out of the ordinary for rehab/flip.

Peter Mckernan · Answer

These loans are good for live in flips... That is an option, the interest rate is higher just a heads up, and if you use it as a live in flip you can make it so you do not have payments for the mortgage for the first 6 months of the loan due to construction! Just for info, and a great way to keep the costs for living expenses low while doing the remodel.

**just be aware the payments not paid will be added to the loan balance, so once you go to pay it off/sell it you will be in more money**

Stendjy Clerveau · Answer

Thank you Peter for taking the time to provide such detailed feedback. I greatly appreciate your insights and fully agree that I need to increase my savings. I am currently saving very aggressively and anticipate being ready in approximately 6-8 months. I understand that purchasing a home is a lengthy and complex process, and while I plan to seek advice in advance, having a stronger cash reserve will undoubtedly strengthen my position.

Should I use an FHA loan or should I wait and save more ?

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