How FHA Loans Can Help Secure Your First Investment Property

Aspiring real estate investors may find it worthwhile to get their first deal done with a FHA loan. The minimum downpayment and credit score FHA loans require is significantly lower compared to many conventional loans. This makes FHA loans ideal for borrowers with low-to-moderate income such as students. These loans currently require a down payment of 3.5%, meaning you can borrow up to 96.5% of a houses value. To look at this in dollar terms, you could acquire a $100,000 property with only $3,500 down!

Now, to qualify for the 3.5% minimum down payment you will need a credit score of at least 580. If your credit score is not quite there yet but is between 500-579, you can still qualify for a FHA loan with a 10% minimum down payment. To qualify for any FHA loan you must also have a debt-to-income ratio of less than 50. This means that your monthly debt payments cannot exceed 50% of your monthly income.  This includes the debt you will acquire from the loan and debt that you are not currently paying such as student loans.

So far all this almost sounds too good to be true right? Well, deals this good almost always have a catch but the one here can turn profitable if played right. The catch is, FHA loans require you to live in the property for at least one year. While it does limit your options, this makes FHA loans ideal for investors interested in house-hacking. Two ideas for this that we have here at Student Investor Club involve either a duplex or a property near your school campus.

The more units your property has the safer it is as an investment. A duplex allows you to live in one unit for a year while still generating income from renting out the other unit. After one year has passed you could continue occupying the property or have both units strictly tenant occupied. Property near school campuses will most likely be a bit pricy but this is where the 3.5% downpayment works in your favor. Going this route will allow you to live in the property and take rent from roommates. The best part is, when you finish school you will be left with a potentially cash flowing investment!

There are several types of FHA loans, each with a unique twist. We will look at two of the most useful ones for investment properties in this article.

FHA 203(k) improvement loan

This particular FHA loan is useful when you as an investor don’t have much money available for an initial investment. A FHA 203(k) improvement loans factor Initial renovation costs into the loan amount which greatly reduces your initial investment. For example, let’s look at a $100,000 property that will need another $10,000 worth of renovations. Instead of your initial costs being both the down payment on the house ($3,500) AND the $10,000 for renovations, they would simply be 3.5% of the cost of the house plus renovations which would work out to be $3,850. This can be extremely helpful when first starting off but it’s important to be mindful that your monthly P&I will in turn be higher.

Section 245(a) FHA loan graduated payment mortgage

This is a great option for younger investors that anticipate a future increase in their income. This loan starts with low monthly payments that gradually increase over time. If you are just starting out as a young real estate investor and the property you are looking at doesn’t require any initial renovations, this loan would be worth looking into.

For many people a house will be the biggest purchase they make. Investing in real estate can be intimidating and stressful for a new and inexperienced investor.   We encourage all our readers interested in investing in real estate to do as much research as they can both through our site and other sources so that they enter their first deal with confidence.