FHA or nah?

[Nickhuman]

Background
I have never bought a home before, so I'm eligible to cash out my nearly ~15k IRA for a first home purchase. I'm also eligible for an FHA loan. However, my employment history is problematic in getting financing. I've been a 1099 and a W-2 employee sporadically over the last few years, hopped around jobs a lot, and therefore my income is hard to predict for lenders.

Goal
Get this cash out of the IRA and in to a property that provides positive cash flow. Living in it rent free is a bonus, not required.

Option A
I've shopped around many lenders, and the only viable option right now is an unqualified mortgage (aka "subprime") for 15% down. Still getting info on the variable interest rate. My friend suggests that I do the math and go for that with the intention of refinancing for conventional down the road.

Option B
I can get a W-2 job within a month, use the paystubs to get an FHA (hopefully). Not sure how long it takes to establish employment history, but I could be waiting up to two years for this route, all for that 3.5% down, 3.5% interest rate.

Problem
Psychologically, I'm tied to the FHA option because it's the only time in my life I'll be able to use it. I want to change my life situation to get it. I know it requires living in the property for 6 months after purchase, so it'll be harder to get positive cashflow right away.

If I get one of these unqualified loans, I can buy a rental property "sight unseen" in a good market and get some cash flow. But it means saying goodbye to the FHA forever.

Questions

1. What process can you recommend to evaluate these options? (I use the bookend method right now—projecting best case and worst case financial scenarios for each option, looking at a 10 year runway)
2. Are there any other options I haven't thought of?
3. What are your favorite methods for evaluating real estate markets for cash flow?

 

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[Millenial_Kid5K1]

I use net present value (NPV) tables for everything. Best thing I ever learned as a chemical engineering student.

 

[biophase]

I use net present value (NPV) tables for everything. Best thing I ever learned as a chemical engineering student.

Is first question the reason you want to buy a home. You say it is to get out of your current situation. Can't renting solve that?

Or is this going to be an investment property? Are you talking a duplex or renting rooms?

Is your income really that erratic? If so, getting a loan might not be the best path now. You could end up losing all your down payment.

 

[MJ DeMarco]

Can't renting solve that?

Take note, he's in the Bay Area... a cardboard tent rents for $5,000/mo and a 800 square foot shipping container is $3.5M to buy.

 

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[Nickhuman]

I use net present value (NPV) tables for everything. Best thing I ever learned as a chemical engineering student.

Thank you, I just had fun making a spreadsheet with NPV, FHA mortgage calculator, insurance, and rental income that tells me if the NPV > Initial investment. Awesome!

Is your income really that erratic? If so, getting a loan might not be the best path now. You could end up losing all your down payment.

Yes, my income has been erratic for the last two years because my thought paradigm was inferior to that espoused on this forum

Take note, he's in the Bay Area... a cardboard tent rents for $5,000/mo and a 800 square foot shipping container is $3.5M to buy.

I am looking for a cash flow positive property outside the bay area, because sadly this assessment is correct.

Thanks everyone for your comments! Really, talking about this with people who understand what I'm asking means a lot.

 

[DustinH]

Just make sure you understand the difference between FHA loans and Conventional loans. An FHA loan only requires 3.5% down while a conventional is typically at least 5% down payment. A big downside to the FHA loan is you have to pay Mortgage Insurance (if you put less than 20% down) for the entire life of the loan. A conventional loan, on the other hand, only requires mortgage insurance if you have less than 20% equity in the property. Once you achieve 20% equity then the monthly mortgage insurance premium goes away.

 

[Brian C.]

What about co-signers? That should help qualify you for the FHA.

 

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[biggeemac]

If possible, I would stay away from FHA for the above reasons. At least with a conventional, if you only put down the minimum down payment, my understanding is that, by law, they have to cease charging you the PMI once it has been established that you own >= 20% equity in the property. I am currently under contract with a new property. I will either pay PMI out of pocket every month, or I will have the lender pay for it with a slight increase in my interest rate. I am leaning more towards paying for it out of pocket because once I have over 20% equity, the PMI goes away. I have to refinance if I go the lender route. You could refinance if you went FHA, but if your credit will allow, why deal with FHA at all? The loan process takes forever and points that they charge and their rules suck.

As far as making money on a house, try to find a way to house hack. Can extra bedrooms be added? How could you make money on the extra bedrooms? I moved to the bay area from 2006 to 2011.....and eventually ended up back in Oregon. If only I knew then what I know now. I pay for my house via SUPER house hacking. My house currently makes around 10k a month AFTER all expenses and I am at only 50% capacity. I found a very unorthodox method to hack my house that is not easy to duplicate, and ALL of the stars were aligned. I now own 1/3rd of the equity in my house and I am using some cash to buy up another house up the street and repeat the process after only being in business for three months. After I am at full capacity, I will proceed to buy up my city. I can guarantee you that most of your average citizens that are renting their houses can barely make the payments with the rental proceeds. Figure out how to NOT be that homeowner.

Good luck !

 

[Nickhuman]

If possible, I would stay away from FHA for the above reasons. At least with a conventional, if you only put down the minimum down payment, my understanding is that, by law, they have to cease charging you the PMI once it has been established that you own >= 20% equity in the property. I am currently under contract with a new property. I will either pay PMI out of pocket every month, or I will have the lender pay for it with a slight increase in my interest rate. I am leaning more towards paying for it out of pocket because once I have over 20% equity, the PMI goes away. I have to refinance if I go the lender route. You could refinance if you went FHA, but if your credit will allow, why deal with FHA at all? The loan process takes forever and points that they charge and their rules suck.

As far as making money on a house, try to find a way to house hack. Can extra bedrooms be added? How could you make money on the extra bedrooms? I moved to the bay area from 2006 to 2011.....and eventually ended up back in Oregon. If only I knew then what I know now. I pay for my house via SUPER house hacking. My house currently makes around 10k a month AFTER all expenses and I am at only 50% capacity. I found a very unorthodox method to hack my house that is not easy to duplicate, and ALL of the stars were aligned. I now own 1/3rd of the equity in my house and I am using some cash to buy up another house up the street and repeat the process after only being in business for three months. After I am at full capacity, I will proceed to buy up my city. I can guarantee you that most of your average citizens that are renting their houses can barely make the payments with the rental proceeds. Figure out how to NOT be that homeowner.

Good luck !

Wow cool idea! Would love to hear more suggested house hacks if you can share.