One of my favorite blogs to follow, Get Rich Slowly, recently published Reader Stories: I bought a duplex to save money on rent. The author of the post describes how he used an FHA mortgage to buy a duplex and with renting out the unit he was not living in, he wound up paying less for his housing than when he was renting.
This is my first “book release”…okay… it’s an “electronic book” or what I refer to as a “guide book”. I plan on writing several books on mortgage related topics. This book happens to be about buying your first investment property.
Although the book is focused on first time home buyers, the information also applies to investors who are buying their second or third investment property.
Watch for more topics to follow soon! You can find this and other slide books at the Mortgage Porter Library.
If you are considering buying a duplex, triplex or fourplex and you’re going to live in one of the units, FHA is a possible mortgage option.
FHA allows for a low down payment of 3.5% (soon to be 5% for FHA jumbos) and is more flexible with credit scores than conventional financing. Just like 1-unit FHA financing, gift funds are allowed towards down payment and closing cost. Sellers can contribute towards bona fide closing cost and not the down payment.
Home buyers should plan on having at least three months reserves (proposed total mortgage payments) in savings for reserves. The reserves can be retirement funds or stocks and bonds.
Buyers may also receive a credit of the monthly rental income to help with qualifying. NOTE: the amount of rent credit will depend on what the current vacancy factor is for the area. Borrowers can plan roughly 75%. In the Seattle area, 85% of the rental income may be used.
Here are the 2013 loan limits for 2-4 units in the Seattle – King County area:
Mortgage rates for FHA 2-4 unit properties are competitive with single family FHA as is FHA’s upfront and annual mortgage insurance (paid in the monthly mortgage payment).
As of this morning, for a 3-4 unit property with a sales price of $600,000 and 5% down payment, I’m quoting:
FHA 30 year fixed: 3.250% (apr 4.081) Most of the closing cost and some of the prepaids are covered with current pricing offering a rebate rate credit of 0.780%.
PIMI payment = $3088.89 (PIMI = principal, interest and mortgage insurance. Property taxes and home owners insurance are additional). Remember, the home buyer will need three months of their proposed mortgage payment in reserves, which is $9,267 for this scenario.
This is a great way to buy your first investment property – as long as you live in it for 12 months after closing.
If you are considering buying or refinancing a home located anywhere in Washington state, please contact me.
There is a lot of interest in the FHA streamlined refinance since HUD has greatly reduced the mortgage insurance premiums for some home owners who originated their existing FHA mortgage May 2009 and earlier. FHA streamlined refinances are designed to reduce mortgage payments and borrowers are not allowed to take “cash out” or pay off existing helocs or second mortgages. In order to qualify for an FHA streamlined refiance, the borrower must have made at least six payments on the FHA loan and needs to be current with the mortgage. Here are a few tips on FHA streamlined refinances I thought I’d share with you.
No appraisal required. If you opt to not have an appraisal, then your new loan amount may not exceed your current loan amount. This means that your closing cost and prepaids/reserves cannot be financed (upfront mortgage insurance is still allowed to be rolled into the loan). Closing cost and prepaids/reserves may be paid for with interest rate rebate credit or cash at closing. If you opt to have an appraisal, then your loan amount may be increased.
Credit qualifying vs non credit qualifying. FHA streamline refi’s may not require verification of your income or assets (non-credit qualifying). Did you know that you may qualify for improved pricing if you opt for a credit qualifying FHA streamlined refi? Pricing varies throughout the day and when I’m locking an FHA streamlined refi for a Washington area homeowner, if pricing is the same, I’ll opt for non-credit qualifying. However if pricing is improved for a credit qualifying streamlined refinance, I’ll advise my client of the pricing differences and let them decide which route they prefer.
Underwriting overlays. Although HUDs guidelines might state something different, the banks and lenders we work with allow us to help home owners who have a low-mid credit score of 640 or higher. If your credit score is below 640, you may want to consider working directly with your bank.
Net tangible benefit. HUD requires that the loan “makes sense” and that is defined as a reduction in your mortgage payment (principal, interest and mortgage insurance) of at least 5%. It may also mean refinancing your FHA ARM into an FHA fixed rate product. Unfortunately, if you’re refinancing an FHA 30 year to a FHA 15 year fixed rate product, and your payment does not go down by 5%, you will not meet the current “net tangible benefit” requirement – even if you’re doing a “credit qualifying” FHA streamlined refinance and fully disclosing your income. This is something HUD needs to correct, in my opinion.
Reduced mortgage insurance premiums. HUD has announced reduced mortgage insurance premiums (both annual and upfront) for FHA loans that were endorsed (insured) by HUD prior to June 1, 2009. FHA loans are endorsed by HUD after closing – sometimes several weeks after closing so it’s possible your FHA mortgage closed in May of 2009 and not endorsed until after the cut-off date.
Credit of your existing upfront mortgage insurance premium (UFMIP). If your existing FHA insured mortgage was originated over the past three years, it may not quaify for qualify for the reduced mortgage insurance, however, you probably will receive a refund of a portion of the original UFMIP. The refund is credited towards the closing cost of your new FHA loan and ranges from 80% to 10% of the original UFMIP by the 36th month.
FHA streamlined refinances are available for non-owner occupied homes too! If you have a home that has been converted to a rental property and the underlying mortgage is FHA, it’s eligible for an FHA streamlined refinance as long as the owner occupied it for a least 12 months. With a non-onwer occupied FHA streamlined refinance, it must be done without an appriasal so no closing cost may be financed (except the upfront MIP).
If you are interested in refinancing your existing FHA insured mortgage on a home located anywhere in Washington, I’m happy to help you. I’ve been originating FHA home loans at Mortgage Master Service Corporation since April 2000, where we have in house FHA underwriters at our main office in King County. Click here for your FHA rate quote.
How to Buy an Investment Property with a 10 Percent Down Payment with no PMI: Fannie Mae Homepath Mortgage
Seattle area investors are taking advantage of current lower home prices and are buying rental properties. One of the issues with investment property is that it often requires a larger down payment and more stringent underwriting guidelines. However, if you buy a qualified property that is owned by Fannie Mae, the Homepath guidelines will allow as little as 10% down for an investment property with NO private mortgage insurance and NO appraisal.
I’m seeing a trend where home owners are refinancing their current home as “owner occupied” and then weeks after closing, try buying another home as “owner occupied”. You cannot have two owner occupied homes. It’s really that simple.
I’ve had a couple of surprised people contact me who thought they could buy a home just following a refinance only to learn by their mortgage originator that they have to finance the new home as an investment property. Financing an investment property not only offers a slightly higher interest rate than a mortgage for a primary residence, it also has tougher guidelines with higher down payment requirements and greater reserves (savings).
If you are considering refinancing your primary residence and possibly buying another home, you should discuss this with your mortgage originator as soon as possible. You will be signing a deed of trust which has language that you intend to occupy that home for 12 months. Some folks might feel that the “intending to occupy” means that they can refinance as owner occupied and a couple months later buy “owner occupied” and odds are, they will be caught. It may be purely unintended for this to happen, but be prepared for the possibility the new purchase to be treated as an investment property, even if you’re going to live there.
If you’re considering taking advantage of the lower home prices and lower rates, you may want to delay your refinance of your current “primary residence” or talk to your mortgage originator about refinancing your current home as an investment property. Your next purchase might qualify as a second home, however the property typically needs to be about 50 miles away from your primary residence (the one you just refinanced) and it is the underwriter’s call on whether or not the second home “makes sense”…this can be a real grey area.
Life happens and we know plans change. Be upfront with your mortgage professional if you’re thinking about buying a home. You may want to ask them to verify with your personal scenario with an underwriter. Finding yourself in the middle of a transaction to buy your next home and having it declined as owner occupied can be an expensive experience.