What is better for my first deal FHA or Conventional

Question

Hello everyone, my name is Ruvim And I am new to the real estate game. I am trying to avoid as much mistakes as I can and wanted to reach out to you guys for help.

Is it better to go for a FHA loan for my first deal or go for a conventional loan?

I don't have much money to start off with so I wanted to go the FHA route my buy box is around 250-300 k. but there are limitations with cash flow for the first year when buying a single family or duplex with FHA rules. I would have to get a triplex to get positive cash flow right from the start because of the 75% rental income that goes toward you qualifying for a loan

With conventional loan the down payment is massive for my current buy box but the positive is that I don't have the limitations like FHA has. I can rent multiple rooms out for example if I buy a house for 300k that has 4 beds 4 baths I can rent each room for 1000+ a month and that's where I will get positive cash flow after all is said and done. If you have any insight on this I would love to learn from you

Rick Albert · Answer

Keep in mind with conventional you can go 5% down. FHA is 3.5% down but has FHA fees so an argument can be made you are paying 5% one way or another. Only difference is you can have the PMI removed on the conventional loan without refinancing.

Where FHA shines is you can have a higher debt-to-income ratio, which increases our buying power. Your payments are higher but you are house hacking, which helps alleviate the pressure of higher payments.

I saw analyze properties going both ways. Keep in mind in most markets putting such little down won't cash flow. Otherwise investors will pick it up putting 20%-30% down no problem.

Daniel Jantz · Answer

this was super helpful, I have a buddy who is a well known realtor that I’ll talk to! Thanks so much.

Laura Shinkle · Answer

@Ruvim Vaskovetskiy there are way too many unknowns with your situation for anyone to tell you specifically what to do without looking at your finances. Really the best answer is to find a Realtor in your area, get pre approved with lenders (I'd ask your Realtor for recommendations) and pick their brain. Once they have your application, they can answer any/all questions you have and advise what's best for YOUR situation. A GOOD lender is an advisor as well, not just a bank. There are a ton of options out there, and it all is going to depend on your finances, cash position and what your goals are.

If you need a Realtor, you can find them on here as well as ask friends for a referral/others that have done what you're wanting to do. Interview them and make sure they understand and can help you do what you want to do. Not every agent is created equal, same with lenders. So don't just settle for the first one you find. Make sure you're comfortable with them, since they're advising you on the biggest purchase of your life thus far! Good luck!

Ruvim Vaskovetskiy · Answer

@Aaron Zimmerman Sure I would love to get pre approved for now to see where I'm at

Alan Asriants · Answer

Here are the main differences between going FHA versus conventional:

FHA:

Pros - typically lower rates, as low as 3.5% down, lower qualifying criteria (higher DTI possible)

Cons - PMI for life of loan, makes buying Triplex or quadplex nearly impossible because of self sufficiency test (at least in my area), stricter appraisal conditions

Conventional:

Pros - No self sufficiency test, no PMI for life, easier appraisal conditions

Cons - tougher to qualify, rates a bit higher

The best answer is to which one to use - it depends.

It's all about the numbers. About a year ago or so it was more favorable for people to use FHA as they were getting better returns because the interest rate was much lower even though you did have PMI for life. It worked out that you would put less money into the deal, but cash flow more. With the rates easing up a little bit that might be different now. Just do the math with your lender

Aaron Zimmerman · Answer

Have you considered a 5% conventional loan? I'm not 100% sure on the reserves requirement though

Raymond J. Rodrigues · Answer

@Ruvim Vaskovetskiy it really depends on the property you're going after. You can buy with as little as 3% down with conventional as a first time homebuyer, and 3% with FHA. Where it really makes a difference in which loan you choose is the property type, your credit score, and what your overall strategy is. Happy to dive deeper on this for you. Seems like you have a few good thoughts spread out there!

Sarita Scherpereel · Answer

In addition to what has been said on this thread I wanted to add that I think it depends on the property. FHA have an inspection that is required for financing not all properties meet the criteria to qualify. Most do, but you might have to fix things prior to close which can be annoying and if the seller is not willing to do the work, it would fall on you or the deal falls apart. Make sure you work with an agent that is hyper aware of what to look for in your market. Chicago (my market) has 100 year old buildings that can be a little tricky. Sellers in our market prefer to work with financing that does not have to work with the additional FHA scrutiny. That said, we still do a lot of these deals despite the self sufficiency test as well.

If you're able to keep both options open and cast a wide net and make your decision case by case, I believe that will position you for the best success. Think about this more like - you have options and either or might work. Run your numbers to see what is best on each homes individually conditions and needs.

Best of luck!

Aaron Zimmerman · Answer

@Ruvim Vaskovetskiy I'm not sure but would you like me to connect you with a lender that would know?

Ruvim Vaskovetskiy · Answer

@Aaron Zimmerman  I looked into conventional loans but most lenders want 15-20 % down. I didn't even consider the possibility of getting 5% on a conventional loan.

Are there specific requirements to attain that 5% besides the reserve requirements ?

What is better for my first deal FHA or Conventional

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