FHA loan/rehab/refi strategy? Does this make sense?

Question

I just had a bid accepted for a 2 unit (zoned for 3) detached home in the Bronx, NY.  There is a significant amount of work that needs to be done, including the conversion to 3 units.  I'm looking for a good strategy to buy with a relatively low cash outlay, do the renovations and increase equity, and then refinance so that I'm not stuck with paying MIP.

The purchase price is around $850k, and I'm looking to put around $200k into the renovation.  If I were able to put 3% instead of 20-25% down on the $850, that would obviously be a big benefit, especially if I planned to refi immediately after the renovation, so as not to pay MIP for an extended period of time.  An added benefit to the FHA mortgage is that one bank offered to essentially cover all of closing costs, around 60k.

Is this a solid strategy?  Am I missing anything here?  Thanks in advance for your responses!

Francis Morris · Answer

No, it not a bad strategy, allows you to hang on to your cashz just ask the right questions to the lender about the loan product and do due diligence, most FHA loans that I am aware of are for owner occupants firstly, not investment property, see what the terms are for refinancing I.e how long until you can. And ask what the closing costs are because FHA notoriously has high closing costs. Additionally I would look at comparables and make sure your going to be able to refi at 80% LTV after you do the work, at 850k purchase price with 3% down your going to need it to appraise for over a million when your done doing the work to rid of PMI, make sure that is a reasonable expectation and that there are homes in that market that sell for that number.

Francis Morris · Answer

Additionally, I just noticed you mentioned your closings costs would be 60k? That's high! Also they dont just cover them they will roll them into your principal balance so just make sure this property will appraise if you intent to refi or in the least cash flow well and give you a good return in the case it doesnt appraise on a refi.

Joshua Goldberg · Answer

Yes, closing costs are super high for this area.  My understanding was that the 60k offered by the FHA-lending bank was straight cash that the bank was offering as an incentive, which as I mentioned above, would cover the vast majority of closing costs.  Will triple check with the bank.

Joshua Goldberg · Answer

Thanks for the reply, Francis.  I should clarify that this will be an owner-occupied home.  The bank that offered the FHA loan with the 60k rebate made clear that this would cover almost the entire amount of the closing cost.  Comps seem to suggest that a refi at 80% LTV is doable, but the sample size is not huge.  My thought is, even if I refi at >80% LTV, at least PMI will go away when I eventually go north of 20% equity, whereas MIP never goes away with the FHA loan.  Appreciate your comments!