Conventional loan or FHA??

Question

I'm looking to buy an investment property but also looking for a main residence. I'm 24, working full time 4 days a week, decent income but i don't have currently enough for 20% down which I've heard is standard for 3-4 unit multifamily. I would prefer not to do a FHA and have to pay PMI on 3 different units till I'm at 20% invested.

I've also heard of a 3.5 - 5% conventional loan where you can avoid PMI and avoid laying down immediate 20% down. The property would cash flow even with me in one of the units. Just need to figure out the best type of loan for a younger dude tryna to get his first purchase. I plan on living in it for at least a year.

Any advice is appreciated!!

Carlos Valencia · Answer

Hi Allen,

If you can go conventional that would be the best option as its less restrictive when purchasing a 3-4 unit property. FHA has a few more guidelines you have to overcome when doing 3-4 purchase.

@Albert Bui @Matthew Kwan

Ryan Thomson · Answer

@Allen Bannister Conventional at this time is going to require you to put 20% down. You'll want to go with FHA or you may have to save for years to get that 20% down.

Even if you have the 20% go with FHA and do 3.5-5% down. The PMI is such a small cost that you could easily invest that extra 15% (if you had it) and get a better return in the stock market over the long run. Heck even the bond market would do better. Don't be scared of PMI it is what allows you to get a house for little down. It's great.

Joshua Filkill · Answer

@Allen Bannister There are loans that could be around 5% down and no PMI so check with local lenders. There may be area and income restrictions on those loans.

Corby Goade · Answer

Welcome to BP- great question!

Unfortunately, conventional does not allow for those discounted down payments on multifamilies, they only do that for single family homes.

In situations like this, FHA is your best bet- it's the cost of doing business, so please don't let that stop you from getting in the game. You are on the right path for sure, there is no better way to start investing than EXACTLY the way you are describing.

Here's what I'd suggest- buy the place using an FHA loan. Hopefully you are in a market with reasonable appreciation and the property has some opportunity for forced equity. As time allows, do some simple upgrades- landscaping, painting, flooring, etc. If I were you, my goal would be to refi out of the FHA loan to a conventional within 2 years- you'd just need to build up approx 20% equity and work the refi costs in to your numbers.

If you have an awesome lender, maybe work out something with them up front where they give you a break on the fees for the refi when you get to that point.

Good luck- go get it!

JooYung Choi · Answer

If you can FHA for a multifamily, you should. Don't worry about PMI.. if your property is in a good location, your rents will cover it.

Keep in mind, for FHA, 3-4 unit homes must pass the FHA self sufficiency test. In my market, it's very hard to find a 3-4 unit MFH that will pass.

I'd recommend FHA into a duplex instead as it's less restrictive. If you're buying a SFH, then 5% conventional is the move.

Conventional loan or FHA??

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