FHA Loan or Conventional / Hard Money?

Question

Hi all!

I am getting ready to buy my first multifamily property which I will be house hacking and living in! I got pre approved for an FHA loan, and I really want to finance with an FHA loan so that it is low money down and will have higher cash on cash return.

However I was told by my agent that with how competitive the market is, it is unlikely for an FHA loan to be accepted when there are so many other offers with conventional, cash, etc.. It was suggested that I try to get a hard money loan (25% down) so I can make a cash offer and then refinance or try to just do a conventional loan.

My question is: Is it better to stick with the FHA loan and just make really aggressive offers, or should I go for a higher down payment loan that is more likely to be accepted? Appreciate the help!

Andrew Freed · Answer

@Jake Soper - Much appreciated! Yes sir, Joe Galvin at movement mortgage in Lowell Mass is a genius when it comes to FHA 203Ks. I recommend him to all my clients. If you give him a call, mention me. He and I work together a lot.

Sean Thompson · Answer

Hey @Chris Lyons,First thing you need to do is determine how expensive your loan would be if you went with HM, then compare that with a larger offer price going with FHA. From here you can understand the math as is relates to your pocketbook. Now the next part of the equation is seeing it from a sellers perspective. If you are getting a ton of offers why would you go FHA unless it is astronomically higher than the other offers? Maybe talk to your agent about putting out two different offers? Both that cost you the same, but present a higher price & a quicker close less hassle option to the seller.

Andrew Freed · Answer

@Chris Lyons - That is a big misconception and I have buyers all the time get houses under contract with FHA products. One of my buddies is a data geek, @Ian Hogan, and he actually pulled data from the MLS in Mass to show how multifamily properties are financed. As you can see, FHA make up more than a quarter of the loans hence people are closing. I myself have closed with FHA's on a househack and I have two clients under contract who used a FHA to score a multifamily. What I would say is, if your agent is advising of this, he probably isn't that good of an agent. You have to be creative with your offers... for instance making the inspection "informational only," putting a 24 hour turn around, make offers on properties sight unseen before the open houses, develop terms that are amenable to the sellers needs. You really need to think outside the box to score a multi now.

@Chris Graham - One of the strategies I've used with my clients is have them start utilizing a FHA 203k streamline loan, which allows you to budget up to $35K of rehab in the loan. This enables your clients to go after multi's that would normally not pass FHA oversight. FHA 203K streamline is also way less paperwork than a traditional FHA 203k, my brokerage has clients close on these loans in as little as 30 days.

Lien Vuong · Answer

I still favor FHA or MassHousing so that you can leverage $ and percentage rate better. The cost of capital is significantly less and you can reuse the tool in the future. Have some patience with this market, you'll get it!

Nickolas Graham · Answer

Hey Chris,

When it comes to the Boston area and multi family homes the competition must be high. I am in the Worcester market and the same can be said out here. Also got to think of the condition of some of these homes as well. One of the biggest challenges my clients have is the restrictions of what FHA will loan on. So to make your offers more competitive say you will cover "x" amount in repairs regarding FHA standards or something of the sort. You will lose out on a fair amount of them but stay committed and just keep with it. I am not big on the idea of getting a hard money loan due to the interest you will be paying on it.

Eric Chiang · Answer

Everyone situation is different, and it seems (from your original post) that you'd be more comfortable with the FHA loan option. As others have mentioned, it may be a bit more difficult to get an offer accepted with FHA, but it definitely works. I'm currently househacking a duplex and I used an FHA loan, albeit it was a property that was on the market for 3-4 months.

Would not suggest sticking with a realtor that pressures you to offer something that you're not comfortable with. Consider having an open conversation with your current realtor about how you're feeling and/or consider other realtors.

Happy investing!

Jim Paulson · Answer

One thing to make sure that you do is run the #'s based on financing it twice before going that route.  The cost of double financing fees (loan origination fees, title, escrow, appraisal, etc.) adds up quick!  I suggest sticking with FHA but putting up non-refundable earnest money and limiting repairs you might ask for on an inspection to only latent/material defects and safety issues so they know you won't nickel and dime them with petty items.

Best of luck!

Jake Soper · Answer

Very insightful data set there, props to your buddy @Andrew Freed. Any tips on lenders that do the streamline 203k loan?

I'm in the same boat, juggling between FHA and conventional for a house hack / live n flip

Tom Wagner · Answer

Such a shame that some agents are out here spewing non-sense such as "you should finance this with hard money instead of an FHA loan". Really awful advice that may result in you being able to close on the property (hint: what they want) more easily but comes with a huge cost post-closing (massive interest payments/fees/risk).

FHA Loan or Conventional / Hard Money?

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