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In a lending market that requires an investor to put 25 percent down on a four unit property, and an owner occupant just 3.5 percent on the same building, it would seem happy days are here again for live-in landlords.
After all, don’t more units always mean more money?
In this case, yes. And yes.
It seems the FHAdoesn’t want any one of us to have too much fun. So, they’ve imposed something of a curfew on the triplex and fourplex market.
Guess what?
Before they’ll even think about giving you a loan, they want to know the net rental income of the property is greater than or equal to the monthly payment. In addition to the mortgage itself, the monthly payment also includes property taxes and insurance.
And with property taxes being based on the artificially high values of a few years ago, that’s tough to do.
What’s the net income? Well, that’s 75 percent of the rent collected from the three units you don’t intend to live in. In other words, the property has to be able to pay for itself with 75 percent of the revenue collected from just 75 percent of the units. Read the rest of this entry »
said on August 14th, 2009 categorized under: Financing
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There was a quiet bit of good news for Minneapolis duplex buyers in the mortgage market this week.
PHH Home Loans and two of its mortgage insurance companies removed the “declining market” label from the Twin Cities.
For the last couple of years, lenders deemed a metropolitan area a “declining market” if the Federal Housing Finance Agency Home Price Index saw a slide in value of, basically, one percent or more. In other words, if the average home price drops, it’s a declining market.
Understandably, banks are reluctant to lend money on a duplex that’s going to be worth less money one year from now. As a result, if a property is in one of these markets, an appraiser may flag it as such. This has, has often resulted in owner occupant buyers who intended to use conventional financing being required to bring more money to closing table for a down payment.
This often meant a 20 percent down payment on the duplex they wanted to live in. Needless to say, this additional cash requirement was a deal breaker for many.
Big deal, right? Just use an FHA loan.
Well, remember those FHA red flags?
Read the rest of this entry »
said on July 16th, 2009 categorized under: Financing
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It sounds presposterous, but a client actually had a computer glitch significantly delay his purchase of a duplex the other day.
As he was using FHA financing, the glitch involved a software problem in the computer system of the federal government. Basically, he had written an offer earlier in the year on a different property, which we were unable to successfully close on. And somehow, the “case number” assigned to the loan he never got remained in the system.
When he went to get a loan for a different property, the government’s software prevented it. After all, you can only have one FHA loan at a time. And the computer said he was applying for a second one. The computer is always right (sarcasm intended).
So I went about looking for alternatives. After all, there are no limits to the number of conventional loans a buyer can have at one time. And I hoped there was a loan product out there with perhaps a down payment of just a little more than FHA’s mandatory 3.5 percent. Perhaps we could find him a conventional loan that required just 5 percent down.
And then I learned something.
While conventional loans on single family homes presently require the buyer to have a minimum of 10 percent down, duplexes are another matter entirely.
We all know investors are required to put 20 – 25 percent down in today’s market. So it should be something less if you’re buying the duplex to live in, right?
Nope. Owner occupants who use conventional financing for their multi-family properties are required to have a 20 percent down payment.
Sadly for my client, it looks like FHA is still the best game in town.
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One of the things I like most about my job is that I learn something every day. Case in point? A client recently posed a question I hadn’t previously considered: is it possible to buy a duplex with a friend and use an FHA loan?
The answer is yes, which may seem obvious. But, doing so does have its own unique challenges.
My clients saw buying a Minneapolis duplex together as way for each to have her own place, but be in a neighborhood they individually couldn’t afford.
The only FHA restrictions, outside of the standard set used for single family homes, is the multi-family duplex has to have two distinctive entrances; no walking through one unit to get to the other.
Great idea, huh? Except for when it comes time to sell.
What if one person wants to and the other doesn’t?
Well, in real estate, there are two ways you can take title (ownership) of a property. The first is called joint tenancy. When two or more people own a property, and one passes away, this form of ownership allows the other to inherit the other person’s share of the property, without going to court. What’s more, this way of taking title requires that both or all owners agree in order for a property to be sold.
The second form of title is called tenants in common. Often referred to by the acronym TIC, this way of holding title allows each individual to will their interest in a property to whomever they chose. What’s more, his or her share may be sold without the permission of the other owner(s).
Of course one owner selling when both parties are on a loan may trigger some alarms at the bank. Not to mention that owning property with friends can be challenging.
That’s why it’s critical that the buyers consult an attorney before they venture in together. It’s better to have negotiated out clauses and understandings of individual and joint responsibilities up front.
It not only helps when it comes time to sell, it may help you keep a friend.
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One of the many advantages for home buyers in today’s tumultuous housing market are the generous FHA loan caps for multi-family properties in the Twin Cities metro area.
Wait? You can get an FHA loan for an income property? You betcha (as they say around here).
While you and I may see a fourplex or a duplex as a multi-family home, the banking industry perceives any residential property with up to four units as a single family home. As a result, the FHA is willing to insure a loan on up to four units.
Why is this such a big advantage in today’s market? Well, FHA loans require as little as 3.5 percent of the purchase price as a down payment, while financing for investors presently commands 20 percent down and one to two points in fees at closing.
For example, in any of the major Twin Cities counties, the FHA will lend up to $407,800 on a duplex. On a $400,000 property, an investor will need to have a down payment of $80,000, as well as another $7000-8000 in fees in addition to the traditional three percent in closing costs. An owner occupant, on the other hand, can purchase the same property with a down payment of $14,000 and three percent in closing costs.
It’s important to note here that while the FHA no longer allows sellers to gift the down payment to a buyer, other parties, like parents, can. However, the seller may still contribute closing costs.
One Family – $318,550
Two Family – $407,800
Three Family – $492,950
Four Family – $612,600
Of course, there is no limit to the amount you can use as a down payment.
Advantage: buyers.
said on October 9th, 2008 categorized under: Financing
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I had a panic attack the other day when a co-worker informed me she just had clients get turned down for a loan because “FHA is no longer letting you count 75 percent of a property’s rental income toward qualifying for the loan”.
Gulp. That would nearly destroy the owner-occupied duplex market.
So I did some digging.
Turns out that yes, FHA did change its rules on using the rental income to qualify; on your purchase of a second home. According to HUD, FHA has seen an increasing number of homeowners choosing to vacate their existing homes and purchase a new one. This may be due to a number of reasons: a shorter commute, growing family, or simply a terrific opportunity.
If the homeowner isn’t able to sell the house or qualify for two mortgages on her own, she has a problem. Many are choosing to solve this by renting their first home out in order to cover the mortgage, which seems like a reasonable enough solution.
The problem is the FHA is concerned that in order to qualify for the second property, the homeowner may provide the bank with misleading facts as to the rental market value of their original home. Were this the case, the home may not demand enough rent to cover the mortgage payment and consequently, end up as another foreclosure.
Of course, there are always exceptions. In order to obtain a mortgage for a second property, the homeowner must be able to: qualify for both properties on her own, be relocating with an employer to an area not within a reasonable commuting distance, or have at least 25 percent equity in the first property.
The thinking with the latter is clearly that the homeowner has more to lose, and the FHA may prevent a “buy and bail”. What’s that? It’s when someone buys a more affordable house with the intention of no longer making payments on the first. Oh? And by the way? If you’re thinking of doing this, it is considered mortgage fraud, which is cause for legal action.
So can you still use 75 percent of the rental income of a duplex to help you qualify to buy the property? Absolutely! It pays to check the facts.
said on June 27th, 2008 categorized under: Financing
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Back in the olden days — when gas was cheap and property went up in value…as long as 18 months ago…the federal government’s department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA) implemented “anti-flipping” rules to help stem fraud during the housing boom.
Under these rules, neither agency would insure mortgages on properties that had been owned by the seller for less than three months.
The purpose was to prevent people from using low-down payment FHA loans to buy foreclosures at incredibly low prices, then resell them within days for enormous profits.
According to Realty Times, the FHA is temporarily suspending its moratorium through June, 2009.
Of course, investors will still have to be able to qualify for the loan. But the resale buyer will not be prohibited from buying the property using an FHA loan simply because it sold within the previous 90 days.
Let’s hope this temporary reprieve helps absorb some of the excess foreclosure inventory.
