Tag: FHA financing

How to buy a Duplex with FHA 3.5% Down Payment

Posted on by Shannon Dooley
By Sorcha Porter: Licensed Assistant to Shannon Dooley

In a time where interest rates are high the possibility of homeownership might feel like it’s becoming out of reach for many buyers. For every point interest rates go up nationally 5million people lose their ability to qualify for home ownership. That combined with financial experts like Dave Ramsay who encourage people to have 20% down when they buy makes the goal of home ownership feel extremely out of reach. Especially in places like Portland Oregon where the average home sells for $566K that downpayment combined with monthly payment makes homeownership feel super inaccessible.

But there’s another way to get on the property ladder that many first time buyers don’t think of. It’s a way that anyone who’s built an income from real estate will tell you either they did, or wish they did starting out. It sets you up for SO much success and can cost LESS than buying a standard single family home. To achieve this you can use the FHA 3.5% down loan to purchase a Duplex.

The main advantages to owning a multi unit property are the following;

  1. Leverage rental income to offset or pay your monthly mortgage.
  2. Use the income from the rental to increase your buying power, lenders can count 75% of market rate rental towards your income if the property is vacant and 75% of the actual rent if the unit is occupied towards your monthly income to help you qualify for more. Meaning you could potentially get into a better home, or neighborhood.
  3. When your tenant is paying some or all of your mortgage you can save SO much money for emergencies, life goals and even future properties!

To break this down I connected with one of Living Room’s Partner lenders James Adair at Neo Home loans to give us the numbers on a property recently sold by Kim Parmon so you can actually see how this pencils out.

“Using the FHA loan program is a fantastic way to access multi unit properties IF you plan to owner occupy.  

With both mortgage interest rates AND home prices rising, the cost to buy and hold real estate has simply never been higher, and it is pressuring the house hold incomes of many families. Buying a property that has more than one living space means you can offset your mortgage payments with the rental income on the other unit. 

The example case study we are using to illustrate this is a recent sale on N Albina that was listed for $699,900.00.

N Albina Duplex Cream, with coral pink doors and green lawn. 4 windows on front and cute wreaths on doors
Front elevation of Kim Parmon’s adorable Albina Duplex listing.

The most common mortgage strategy for multi unit is the FHA loan program.  The FHA simply offers the most LEVERAGE in that you are allowed to buy a 2-4 unit property with as little as 3.5% down payment. 

Non-FHA insured alternatives usually require much more down, but the FHA really shines here.  Not only can you access some income offsetting monthly mortgage costs with FHA –but you can also use the NEW RENTAL income to help you qualify for the mortgage.  This means that you’re buying power is amplified when you get a multi unit property like this.  

In our example the rented unit was producing approx. $2300 per month.  This translates to $20,700.00 of additional qualifying income for the financing.  More simply put- this particular property adds $140,000.00 of NEW BUYING POWER.  

As this property is listed for $699k – if your max purchase price on a NORMAL SINGLE FAMILY property was $560k – you could conceivably qualify for this purchase price, due to the added qualifying income. 

We estimate that this property with a minimum 3.5% down payment would translate to a total PITI+MI payment of approximately $5,200 per month.  When you adjust for the $2300 of income, the NET cost to live here becomes $2,900 per month.  If you wanted to land at a monthly mortgage of $2900, you’d end up capping out at a purchase price of about $355k (with the same down payment dollar amount).  

The buying power is only part of the story- the ECONOMIC LIFESTYLE POWER is equivalent to the difference between $699,900 and $355,000 – that’s $344,500 of magic real estate bucks that the other unit creates for the buyer. “

In conclusion…

If you’re looking at buying a home in 2023, and you’re daunted by the interest rates, and rising costs this is a way for you to get on the property ladder, and once you’re on it it’s so much easier to climb and leverage it to your advantage. If you’d like to learn more about duplex purchases, and or buying an income property we’d love to talk to you. Just reach out to us here! And be sure to connect with a lender, James is licensed in 48 states so odds are good he can help you wherever you are!

 

The Market In Focus: Cycle of Real Estate and FHA Financing – are we primed for a change?

Posted on by Aryne + Dulcinea

By Aaron Nawrocki, Capital M Lending

If you talk to Portland real estate agents these days, most will tell you we are seeing a sea change in the market. Buyers are pickier, listings are sitting longer and more transactions are terminating after inspections. Of course, some if this is completely normal – homes don’t typically sell in three days for full price. So what is the relationship between the cycle real estate and FHA Financing? With a rise in marketing times, inventory and FHA financing, the real estate cycle will likely experience a slowdown.

We’ve had an amazingly robust market, with Portland’s median price up over 45 percent from the bottom 8-10 years ago. It’s been a run fueled by strong economic growth, Portland’s livability and position as one of the more affordable west coast cities. The increased values were also supported by gradually loosening mortgage underwriting criteria that made it easier for homebuyers to get mortgages. Now, these looser criteria were nothing like what we saw in the early 2000’s. Income, assets and credit were all verified and loans originated from 2010 to today are performing very well.

What accounts for the market slowing, then? Is this a warning sign? Home prices have risen faster than incomes. In conjunction with higher interest rates, that makes homes less affordable. It’s just harder to buy a home with a comfortable monthly payment than it was 5 or 6 years ago. Much of the pool of well-qualified buyers already bought in the last eight years. There are fewer buyers, and those that remain often have higher debt to income ratios and lower credit scores. Overall credit quality is down and Fannie Mae and Freddie Mac are beginning to tighten up their guidelines to lower risk. Because it’s easier to qualify for an FHA mortgage, more buyers are using FHA financing. Here’s where there are some similarities with 2008; the rise in FHA loans was dramatic when the housing market cratered. Currently, FHA originations are 20% of new loans issued, vs the historical average of 9%.

Fannie Mae and Freddie Mac are chartered differently than FHA. They are tasked with providing liquidity, whereas FHA is chartered to raise the level of homeownership.  That means FHA is supposed to do riskier loans. They are supposed to step in and make loans when other entities will not. Nowhere was this more evident than when the bubble burst. FHA mortgages went from 3% of new purchase loans issued in 2007 to 28% of the market in 2009. FHA did exactly what they were supposed to do – when lenders were reluctant to originate new mortgages, FHA provided the guarantee that kept the real estate market going. Of course, the dramatic rise in FHA loans occurred after the market had crashed, not before.

So – we have sales slowing, affordability declining and FHA’s market share rising. Does this mean that the market has peaked and that we’re looking at a repeat of 2009? It makes for exciting articles on the internet, but probably not. We are all subject to a preference for recency, and when it takes more than a week to sell a home, it’s easy to jump ahead and assume the market is ready for a “correction”. The likely answer is that sales and price activity are within a healthy band. Within that band there are mini peaks and valleys that do not necessarily represent the beginning of a long term trend. Watch inventory – we’re currently at 3.9 months, underneath the 4 month average in the “boom” years from 2000 – 2005. For perspective, inventories peaked at over 10% in 2008. When we see a rise in marketing times, an increase in inventory and a rise in FHA financing, it’s likely there’s a trough coming in the real estate cycle. For now, expect slow growth and some stagnancy as sellers adjust to a more balanced market. It’s a great time to get advice from a trusted realtor, as we see well-marketed homes still moving quickly.

 

Aaron Nawrocki has over 20 years of direct experience overseeing mortgage and loan processes, working to provide clients the market insight and lending expertise required to make informed decisions.

About Us:
Over the course of their professional partnership, Aryne + Dulcinea have helped over 200 clients prosper in their new lives. During this time, they have prided themselves in their top-notch selling abilities, with homes outperforming market standards, consistently exceeding list price while most of their listings sell in under 7 days. Whether you’re looking to buy or sell, Aryne & Dulcinea will work in collaboration to guide you in investing in your future and reaching your real estate goals.