I am currently considering the purchase of a 3 family house in Brooklyn for $1,100,000 and after conversations with my mortgage broker, there seem to be 2 options on the table in NY: a) Purchase the property with 20% down at close to 4% rate or b) Get an FHA Loan with 3.5% down with a rate of 3.3% upto $1,127,000. I realize that even though the rates are lower with an FHA, there is upfront PMI... [more]
I am currently considering the purchase of a 3 family house in Brooklyn for $1,100,000 and after conversations with my mortgage broker, there seem to be 2 options on the table in NY:
a) Purchase the property with 20% down at close to 4% rate or
b) Get an FHA Loan with 3.5% down with a rate of 3.3% upto $1,127,000.
I realize that even though the rates are lower with an FHA, there is upfront PMI (1.75%) and monthly PMI, which would negate the benefits of the lower rate.
However, if I were to purchase a property that required renovation and put the extra money (e.g. $200k) I would have paid from the down payment into the renovation instead, I could easily see the property re-appraising for significcantly more post renovations, and thereby removing the monthly PMI requirement.
The net effect of this transaction would be that I could get a much lower rate going the FHA than the conventional loan route. The price to pay would be the upfront MIP of 1.75%.
Has anyone considered this approach or can anyone suggest anything I might not be considering? Any pitfalls aside from renovation risk?
Much appreciated,
Sana
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Response by tcurranmortgage
almost 13 years ago
Posts: 52
Member since: Jul 2012
Good morning Sana,
Keep in mind that, when you say, "I could easily see the property re-appraising...thereby removing the monthly (MI) requirement," this means that you would be refinancing the mortgage after 12 months and after completing the renovations. You would have to refinance because FHA Monthly Mortgage Insurance (it's called MMIP, not PMI), MUST be paid until you meet BOTH of the following two conditions:
1. FIVE years on time payments
2. You pay in 22% of principal based on the original purchase price
In other words, unlike PMI (Private Mortgage Insurance), you cannot simply get a new appraisal a year later to cancel the FHA MMIP. You STILL have to pay it for FIVE YEARS.
And you've still paid the 1.75% UpFront Mortgage Insurance Premium (which is financed into the loan at closing).
So, if it's a refinance you propose to do to eliminate the FHA Insurance after one year, there are several problems with this.
1. Closing costs: you'll pay them again when you refinance. If you can avoid paying the NYS Mortgage Tax by undertaking a tricky legal maneuver called a CEMA (Consolidation, Extension, Modification and Assignment) which requires the active cooperation of your existing Lender at the time, you'll significantly reduce your closing costs. But Lenders are not REQUIRED to cooperate with requests for this "assignment of mortgage." So there's a gamble your Lender getting paid off at the time won't cooperate. In addition, you'll pay other closing fees including updated title search/insurance (albeit at reduced rates, but you'll still pay again), and bank fees, including origination fees, appraisal, and bank attorney. Oh, and the County Clerk is going to take his pound of flesh, too, by recording the Satisfaction of the old mortgage and the new mortgage document. More fees.
2. Documenting the Renovations: you'll need to document every penny spent and provide that documentation to the Appraiser at the time of appraisal a year later when you refinance. BUT, that does not guarantee you'll get the value you think you deserve based on your work. In general, it's going to take a LOT for an appraiser to agree your home has increased 20% or more in value after only one year. Remember, we're working in a very conservative lending environment.
3. Future Value: assuming the Appraiser (and your new Lender's Underwriter) agree with the value added through your renovations, who's to say the value is really going to be there for that property a year later?
Trevor Curran
NMLS #40140
Mobile: 516-582-9181
Office: 516-829-2900
Fax: 516-829-2944
PowerHouse Solutions, Inc.
185 Great Neck Rd, Suite 240
Great Neck NY 11021
Licensed Mortgage Banker – NYS Dept. of Financial Services
NMLS#3528
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Response by notadmin
almost 13 years ago
Posts: 3835
Member since: Jul 2008
> b) Get an FHA Loan with 3.5% down with a rate of 3.3% upto $1,127,000.
put as little as possible and let the taxpayer deal with all the downside risk imho.
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Good morning Sana,
Keep in mind that, when you say, "I could easily see the property re-appraising...thereby removing the monthly (MI) requirement," this means that you would be refinancing the mortgage after 12 months and after completing the renovations. You would have to refinance because FHA Monthly Mortgage Insurance (it's called MMIP, not PMI), MUST be paid until you meet BOTH of the following two conditions:
1. FIVE years on time payments
2. You pay in 22% of principal based on the original purchase price
In other words, unlike PMI (Private Mortgage Insurance), you cannot simply get a new appraisal a year later to cancel the FHA MMIP. You STILL have to pay it for FIVE YEARS.
And you've still paid the 1.75% UpFront Mortgage Insurance Premium (which is financed into the loan at closing).
So, if it's a refinance you propose to do to eliminate the FHA Insurance after one year, there are several problems with this.
1. Closing costs: you'll pay them again when you refinance. If you can avoid paying the NYS Mortgage Tax by undertaking a tricky legal maneuver called a CEMA (Consolidation, Extension, Modification and Assignment) which requires the active cooperation of your existing Lender at the time, you'll significantly reduce your closing costs. But Lenders are not REQUIRED to cooperate with requests for this "assignment of mortgage." So there's a gamble your Lender getting paid off at the time won't cooperate. In addition, you'll pay other closing fees including updated title search/insurance (albeit at reduced rates, but you'll still pay again), and bank fees, including origination fees, appraisal, and bank attorney. Oh, and the County Clerk is going to take his pound of flesh, too, by recording the Satisfaction of the old mortgage and the new mortgage document. More fees.
2. Documenting the Renovations: you'll need to document every penny spent and provide that documentation to the Appraiser at the time of appraisal a year later when you refinance. BUT, that does not guarantee you'll get the value you think you deserve based on your work. In general, it's going to take a LOT for an appraiser to agree your home has increased 20% or more in value after only one year. Remember, we're working in a very conservative lending environment.
3. Future Value: assuming the Appraiser (and your new Lender's Underwriter) agree with the value added through your renovations, who's to say the value is really going to be there for that property a year later?
Trevor Curran
NMLS #40140
Mobile: 516-582-9181
Office: 516-829-2900
Fax: 516-829-2944
PowerHouse Solutions, Inc.
185 Great Neck Rd, Suite 240
Great Neck NY 11021
Licensed Mortgage Banker – NYS Dept. of Financial Services
NMLS#3528
> b) Get an FHA Loan with 3.5% down with a rate of 3.3% upto $1,127,000.
put as little as possible and let the taxpayer deal with all the downside risk imho.