In previous posts, I have written about the advantages of leveraging private mortgage insurance to acquire investment properties. While this is true, and for lower wage earners, often necessary, it can also be expensive. New rules for FHA mortgages now require the PMI to stay on for the life of the loan, you can read more about FHA loans and financing a multi-family here.
To recap quickly, one can use the FHA program a single time to purchase a building with up to four units. It has a number of benefits. Namely, a 3.5% down payment option, lower credit score, and lower income. The requirement is that you should live in the property for at least a year after purchasing it, and it should be purchased with the ‘intention’ of it being primary residence.
Under the former FHA guidelines, the mortgage insurance would drop off at 78% LTV. Now, however, the mortgage insurance stays on for the life of the loan. Meaning that if one wishes to remove (the often costly) PMI on an FHA loan, they will need to refinance. It is now much more of a risk to go this route.
In contrast to typical PMI, which automatically cancels at some predetermined LTV (Usually 80%), FHA will theoretically last forever. To look at an example of this, I used a property that I bought using the program:
House purchased at approximately $250,000, 3.5% down, 3.75% interest rate = about $220.00 per month in PMI.
I still believe that the FHA program can offer an incredible advantage for people looking at buying their first investment property, however, this throws another serious consideration into the mix. Anyone thinking of doing this must now evaluate the risk of not being able to refinance when the LTV hits 80%. Their could be any number of reasons not to refinance. One of the first that comes to my mind is in the area of interest rates. In my case, I am at 3.75%. I may never refinance that building because I do not know if I would be able to get a rate even relatively close to that. I am not in the “forever group” because of when the loan was originated.
For myself, using FHA would depend on the profitability of the building, as well as the interest rate originally obtained, and the planned financial and real estate moves of the future. Just another example of how it might not matter: if an individual is planning on selling the building in ten years, it is still profitable and fits into their financial picture, then the PMI dropping off is essentially a moot point since it takes about 7.5 to 10 years depending on the interest rate.
Lots to consider.