May 28, 2024
Investment

How to Start With FHA Loan


Courtesy of Matt Slowik

  • Matthew Slowik got his first investment property with a FHA loan in 2008.
  • Since then, Slowik  has acquired 10 properties that make $21,000 a month in revenue.
  • He said to be aware of a few caveats with FHA financing — occupancy fraud is a very real thing.

This as-told-to essay is based on a conversation with Matthew Slowik, a real-estate investor and the owner of Revival Homebuyers, who’s based in Western Massachusetts. The following has been edited for length and clarity.

On a fall day in 2000, I returned home from high school, and my parents told me we’d be going out to dinner to celebrate — they’d just paid off their mortgage. It was then that I realized I wanted to do as they’d done.

Real-estate investing was ingrained in me at an early age. I was raised in a duplex, which my parents purchased in 1978, and they did everything right — they always had long-term tenants and great owner-occupied tenant relationships.

Fast forward to 2007. Fresh out of college, I had student-loan debt and a low-paying entry-level job. My only focus was to find a two-family home to start my real-estate investing journey. Today, I’m a safety compliance manager for a waste company in Hartford, Connecticut, and I’m a real estate investor with 10 properties that net me around $21,000 a month in revenue.

I started by utilizing a Federal Housing Administration (FHA) loan. One of the things I appreciated most about the FHA loan was that it was designed to make homeownership more accessible for someone like me. Because I didn’t have a significant credit history, and I had limited funds for a down payment, the FHA loan was a perfect fit. Here are my best tips on how to get started.

1. Make sure you’re ‘lendable’

The first step when looking to acquire your first property is to determine if you, and the property you’re considering, are lendable. At the time, I wasn’t sure what it meant to be lendable — but I soon found out that it’s all about having a good credit score and a favorable debt-to-income ratio.

When choosing a lender for my first FHA property in 2008, I discussed my intentions with multiple mortgage brokers recommended by my real-estate agent and landed with one who I felt understood my situation and, more importantly, educated me through the process as a first-time homebuyer. I felt comfortable, was informed rather than rushed, and wasn’t treated as just another number in a broker’s book of business. 

In order to identify how much I could borrow and determine my lendability, I provided my broker with the necessary documentation, which included my credit score, pay stubs, tax returns, and income from my W-2 job.

The whole process can be grueling. You’ll most likely have to submit — and then resubmit — updated bank statements, pay stubs, and other miscellaneous documents.

Once I’d submitted my paperwork, my broker was able to source the best options for me at the time, which was during the subprime mortgage financial crisis. My broker ended up sourcing an FHA and an FHA 203(k) loan with Wells Fargo. While an FHA loan is a government-backed mortgage, an FHA 203(k) loan is a type of FHA loan that’s specifically meant for home renovations or repairs.

An FHA 203(k) allows borrowers to roll the cost of their home improvements into their mortgage by borrowing up to 110% of the home’s value after the improvements are made

Because I was straight out of college — with piling college debt but no credit cards or car payments, minimal savings, and W-2 income that was less than a year established, I was the ideal candidate for an FHA loan with the guidelines that existed at the time.

2. Give yourself clear criteria for a home purchase

When I evaluated my first owner-occupied property, I focused on several important factors that have remained relevant. The first was potential locations — I looked for neighborhoods with good schools, transportation, low crime rates, and rent potential.

Next, I considered the condition of the property. Properties that are structurally sound but require cosmetic updates may come at a higher cost. However, distressed properties that require significant repairs might be more affordable but require a budget to make them safe, comfortable, and rent-ready.

Finally, I examined the particular property type, such as duplex, triplex, or quadplex. A traditional FHA loan limits you to two to four units. It wasn’t long until I identified my first property: a very small two-family property, each with one bedroom and one bathroom, in a middle-class area listed for $115,000. 

This home was a throwback to 1970, but I knew I’d be able to update everything through my own time and labor so I chose not to take on a larger debt by utilizing the FHA 203(k) option. I purchased the home with a tenant residing in one of the units and I lived in the other. I also wanted the tenant to cover a majority of the mortgage 

3. Consider refinancing your loan for your next property

With a tenant able to pay close to my entire mortgage — $1,000 of the $1,150 — and a home valued higher than what I was purchasing it for, I became the owner of my very first owner-occupied rental property. Since purchasing my first owner-occupied investment property in 2008, I’ve used Zillow to source qualified tenents and a local landlord association for support.

Six years later, with my first property completely updated and rents increased to fair market rent ($1,200), I refinanced my loan to conventional lending. This allowed me to identify another property I purchased within FHA guidelines: a three-bedroom, single-family home, which I purchased within the guidelines of a conventional Fannie Mae HomeStyle Renovation Loan.

The HomeStyle Renovation Loan applies to a one to four-unit primary residence, a one-unit second home, or a one-unit investment property. The difference with this type of loan is that 5% of the total loan is required as a down payment, and it often comes with a higher interest rate, which at the time of my purchase was 5.75%.

Since 2015, as it applies to utilizing FHA financing to acquire properties, my wife and I have purchased our dream home — a 1771 farmhouse — and a two-family second home as a beach rental investment property.  

4. Be aware of a few caveats with FHA financing

First, while there’s no limit on a borrower utilizing an FHA loan, you can’t have two loans running concurrently — and it must be your intention to live in the property you’re financing for a minimum of one year.

Second, to continue purchasing income properties with an FHA loan, the loan underwriter must be satisfied that you’re establishing a new primary residence more than 100 miles from the prior residence or relocating for employment-related reasons, that your family size is increasing (to house additional children or family members), that there’s a non-occupying co-borrower (you’re buying for an aging parent, then yourself), or you’re vacating a co-owned property.

With the purchase of our forever home, we overcame this challenge by refinancing our two-family home with a conventional mortgage, so that an FHA loan could be used. Having a second home is a qualifying term, so this was not a big obstacle to overcome. 

Before you take the leap, run through different scenarios. Know the price you’re willing to pay; what the down payment will come to; the interest rate; rent you plan to charge by referring to the HUD’s Office of Policy Development and Research; and what homeowner’s insurance you’ll need. Finally, factor in what money you’ll set aside for repairs and vacancy, what your cash flow will be, and what costs are associated with a refinance.

Here’s another warning: occupancy fraud is a very real thing. Avoid this at all costs, not only do you expose yourself to having the loan recalled by your lender, but breaking the terms of an FHA mortgage without permission from the lender can result in serious legal and financial consequences. 

5. Take the time to invest in yourself

Read, research, and network with other investors, local bankers, and hard-money lenders. Also, learn about purchasing homes through unconventional, creative terms.   

Interest rates are now higher than when I first started investing in 2008. Don’t let this be a deterrent. Do your homework, know your numbers, and if done correctly, you’ll pass the rate increase off in rents received.

Despite my success, there are some things I would’ve done differently

My biggest change in retrospect would’ve been to maximize the unit count within the FHA guidelines.

By increasing my unit count from two to four — after meeting the one-year owner-occupied residency requirement and refinancing the property to conventional financing — I could’ve then identified a smaller two or three-family property to own or occupy. My borrowing allowance would’ve been higher, allowing me to identify another property within the FHA guidelines.  

Also, while sweat equity is good in theory, I took too long to update both units of the first property before I refinanced them. I should’ve used the FHA 203(k) loan to help me renovate them faster.



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