Conventional vs FHA - DC multi

14 Replies

What are the pros/cons to a 5% Conventional loan vs 3.5% FHA loan on 4-unit complex in DC?

Also, just to note, it's a bit of a rehab property - probably 30k in renovations - but don't wish to do a 203k loan.

Any helpful info or advice would be greatly appreciated!

Well you cant do a 5% down conventional on a multi, so the benefit with FHA is actually being able to use the loan.

Also, if it doesnt pass FHA standards, you would have to do a 203k loan. And you will be very very hard pressed to get a 203k loan offer accepted.

@Russell Brazil

Okay, I was under the impression that you could. Also, that's a good point - if it's a 203k, it is what it is.

Thanks for your response!

  

@Maria Silva If the property is not going to pass appraisal inspection, then your only option is a rehab loan. You have two options as an owner occupied property - FHA 203(k) 3.5% down OR Fannie Mae HomeStyle Renovation loan 25% down. If the work is cosmetic work and you have the money to cover the rehab, then you might be able to buy it using a standard Fannie Mae (25% down).

One other thing to keep in mind with a 4 unit property using an FHA loan the property must meet self sufficiency guidelines. What that means is the total rent from all 4 units must be equal or greater than the PITI payment after you subtract 25% from the gross rental income.

Originally posted by @Russell Brazil :

Well you cant do a 5% down conventional on a multi, so the benefit with FHA is actually being able to use the loan.

Here's a commercial from Freddie Mac's youtube channel that says you can. I know you aren't a lender, so tell your lender to read up on it, do the extra training to be able to offer it, and set aside 20 minutes with you to go over bullet points. :) 95% LTV conventional won't always work for every property, but it's the best option out there when it can. I'm pretty sure no one else offers it in the Bay Area, so it's not unreasonable to assume that your lender will become the only one offering it in DC/NoVa/MD (that youtube video is a couple years old and only has 1581 views as of this post- this is flying under everyone's radar), which certainly bodes well for you. The commercial linked above talks about income limits, but in most of my market the income limit is literally "no income limit"... it's kind of hard to be over a "no income limit" income limit! I'm guessing it's the same for much of DC and southern Maryland, probably not NoVa from what I remember of the area >15 years ago. 

Preapproval letters the way I do them consist of 3 pages (buyer's agent can use whatever of this they want)...

  • Preapproval letter.
  • Flier highlighting all the pesky FHA stuff not applicable to it. FHA self sufficiency test, FHA property standards, etc, gone, so you Mr. Listing agent should go ahead throw all the FHA offers in the garbage and tell your client to take this offer.
  • Map of census tract of subject property showing the program income limit, especially if it is a "no income limit" census tract.

@Maria Silva , a conventional offer will always be viewed as stronger than FHA. So the advantage is your offer has a far greater chance of being accepted by the seller at all. If a previous FHA offer fell out, the seller will typically be 'done like a cinnamon bun' with FHA and take yours if it is conventional and not insultingly low.

Hi, @Diana Yun , how's that property working out? :P

Originally posted by @Chris Mason :
Originally posted by @Russell Brazil:

Well you cant do a 5% down conventional on a multi, so the benefit with FHA is actually being able to use the loan.

Here's a commercial from Freddie Mac's youtube channel that says you can. I know you aren't a lender, so tell your lender to read up it, do the extra training to be able to offer it, and set aside 20 minutes with you to go over bullet points. :) 95% LTV conventional won't always work for every property, but it's the best option out there when it can. I'm pretty sure no one else offers it in the Bay Area, so it's not unreasonable to assume that your lender will become the only one offering it in DC/NoVa/MD (that youtube video is a couple years old and only has 1581 views as of this post- this is flying under everyone's radar), which certainly bodes well for you. The commercial linked above talks about income limits, but in most of my market the income limit is literally "no income limit." I'm guessing it's the same for much of DC and southern Maryland, probably not NoVa from what I remember of the area >15 years ago. 

Preapproval letters the way I do them consist of 3 pages (buyer's agent can use whatever of this they want)...

  • Preapproval letter.
  • Flier highlighting all the pesky FHA stuff not applicable to it. Self sufficiency test, FHA property standards, etc, gone.
  • Map of census tract of subject property showing the income limit, especially if it is a "no income limit" census tract.

@Maria Silva , a conventional offer will always be viewed as stronger than FHA. So the advantage is your offer has a far greater chance of being accepted by the seller at all. If a previous FHA offer fell out, the seller will typically be 'done like a cinnamon bun' with FHA and take yours if it is conventional and not insultingly low.

Hi, @Diana Yun , how's that property working out? :P

 You just blew my mind

Originally posted by @Russell Brazil :
Originally posted by @Chris Mason:
Originally posted by @Russell Brazil:

Well you cant do a 5% down conventional on a multi, so the benefit with FHA is actually being able to use the loan.

Here's a commercial from Freddie Mac's youtube channel that says you can. I know you aren't a lender, so tell your lender to read up it, do the extra training to be able to offer it, and set aside 20 minutes with you to go over bullet points. :) 95% LTV conventional won't always work for every property, but it's the best option out there when it can. I'm pretty sure no one else offers it in the Bay Area, so it's not unreasonable to assume that your lender will become the only one offering it in DC/NoVa/MD (that youtube video is a couple years old and only has 1581 views as of this post- this is flying under everyone's radar), which certainly bodes well for you. The commercial linked above talks about income limits, but in most of my market the income limit is literally "no income limit." I'm guessing it's the same for much of DC and southern Maryland, probably not NoVa from what I remember of the area >15 years ago. 

Preapproval letters the way I do them consist of 3 pages (buyer's agent can use whatever of this they want)...

  • Preapproval letter.
  • Flier highlighting all the pesky FHA stuff not applicable to it. Self sufficiency test, FHA property standards, etc, gone.
  • Map of census tract of subject property showing the income limit, especially if it is a "no income limit" census tract.

@Maria Silva , a conventional offer will always be viewed as stronger than FHA. So the advantage is your offer has a far greater chance of being accepted by the seller at all. If a previous FHA offer fell out, the seller will typically be 'done like a cinnamon bun' with FHA and take yours if it is conventional and not insultingly low.

Hi, @Diana Yun , how's that property working out? :P

 You just blew my mind

 Sorry if I just gave you some extra work @Upen Patel . :) But you will like what you see when you get the secondary marketing people to fix your pricing engine to return 2-4 unit 95% LTV FHLMC / LP interest rate pricing... I've got $20 here that says OB with your company returns "no available mortgage product" if you run it now before you've raised hell, so this will be some back and forth and oxygen expended on your part educating the people that are supposed to be smarter than you! May also have to get them to add a new PMI company or two to the roster, since most will not offer PMI on 2-4 unit.

Chris yes HomePossible allows for 5% down on multi families but the original poster indicates that it needed rehab some HP would not work here. I have tried doing several HP multi families and LP is not a fan unless the borrower has SIGNIFICANT reserves. I had 2 different scenarios where the DTI was under 35% and 12 months reserves with a 730 or higher FICO and LP would not approved. Even got Freddie people on the phone to make sure it was running correctly and they confirmed and said LP is tough on those files.

Originally posted by @Bill Rich:

Chris yes HomePossible allows for 5% down on multi families but the original poster indicates that it needed rehab so HP would not work here. I have tried doing several HP multi families and LP is not a fan unless the borrower has SIGNIFICANT reserves. I had 2 different scenarios where the DTI was under 35% and 12 months reserves with a 730 or higher FICO and LP would not approved. Even got Freddie people on the phone to make sure it was running correctly and they confirmed and said LP is tough on those files.

Originally posted by @Chris Mason :
Originally posted by @Russell Brazil:
Originally posted by @Chris Mason:
Originally posted by @Russell Brazil:

Well you cant do a 5% down conventional on a multi, so the benefit with FHA is actually being able to use the loan.

Here's a commercial from Freddie Mac's youtube channel that says you can. I know you aren't a lender, so tell your lender to read up it, do the extra training to be able to offer it, and set aside 20 minutes with you to go over bullet points. :) 95% LTV conventional won't always work for every property, but it's the best option out there when it can. I'm pretty sure no one else offers it in the Bay Area, so it's not unreasonable to assume that your lender will become the only one offering it in DC/NoVa/MD (that youtube video is a couple years old and only has 1581 views as of this post- this is flying under everyone's radar), which certainly bodes well for you. The commercial linked above talks about income limits, but in most of my market the income limit is literally "no income limit." I'm guessing it's the same for much of DC and southern Maryland, probably not NoVa from what I remember of the area >15 years ago. 

Preapproval letters the way I do them consist of 3 pages (buyer's agent can use whatever of this they want)...

  • Preapproval letter.
  • Flier highlighting all the pesky FHA stuff not applicable to it. Self sufficiency test, FHA property standards, etc, gone.
  • Map of census tract of subject property showing the income limit, especially if it is a "no income limit" census tract.

@Maria Silva , a conventional offer will always be viewed as stronger than FHA. So the advantage is your offer has a far greater chance of being accepted by the seller at all. If a previous FHA offer fell out, the seller will typically be 'done like a cinnamon bun' with FHA and take yours if it is conventional and not insultingly low.

Hi, @Diana Yun , how's that property working out? :P

 You just blew my mind

 Sorry if I just gave you some extra work @Upen Patel. :) But you will like what you see when you get the secondary marketing people to fix your pricing engine to return 2-4 unit 95% LTV FHLMC / LP interest rate pricing... I've got $20 here that says OB with your company returns "no available mortgage product" if you run it now before you've raised hell, so this will be some back and forth and oxygen expended on your part educating the people that are supposed to be smarter than you! May also have to get them to add a new PMI company or two to the roster, since most will not offer PMI on 2-4 unit.

Hey! Chris. No extra work here. I have done many Freddie multi with just 5% down. I prefer it when every possible. I can even do the high balance stuff. Have a good secondary marketing team and I certainly keep them on their toes.

Originally posted by @Bill Rich :

Chris yes HomePossible allows for 5% down on multi families but the original poster indicates that it needed rehab some HP would not work here. I have tried doing several HP multi families and LP is not a fan unless the borrower has SIGNIFICANT reserves. I had 2 different scenarios where the DTI was under 35% and 12 months reserves with a 730 or higher FICO and LP would not approved. Even got Freddie people on the phone to make sure it was running correctly and they confirmed and said LP is tough on those files.

That's odd to read, that hasn't been my experience at all. High reserves and low DTI... it wasn't the income limit biting you was it?

Actually no, the area was exempt from the income limit. According to Freddie IT people (the ones who set up the algorithms for LP) the HP is a very tough program with multi family in general

Hey, @Chris Mason ! The triplex is doing well. We are coming to the end of our one-year owner-occupancy requirement. Will be looking to get another multi-family this year.

@Maria Silva You should connect with a good lender who's not going to give you BS "overlay" rules. We were having conversations with three other lenders until we found Chris Mason. We're sticking with him :)

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