We’ve talked a lot about the FHA program on this site. For those just joining us now, FHA is a federal government program that encourage homeownership by making it possible for non-owners to buy homes or small apartment buildings with as little as 3.5% down. Sounds pretty amazing, right?
It was. I helped some friends buy an amazing duplex in Echo Park, one that I know will end up being worth $1MM+, for something like $40k down. I helped some other friends take down a huge fourplex in Boyle Heights with something like $50k down.
But, sadly for me and some of my clients, that time is coming to an end. Why?
1. With so many people interested in getting their money out of the bank and into apartment buildings, sellers have become much pickier about buyers’ financing. FHA loans are harder to close than conventional loans because there is much less margin for error. So, given a choice, sellers generally opt for buyers using conventional loans.
2. FHA buyers used to be able to counteract the negatives associated with that form of financing by offering slightly higher prices. However, the increasing cost of mortgage insurance (which FHA requires) means that FHA loans don’t work at prices much above 10.5x GRM. As the market price for apartment buildings has increased above that point, FHA buyers have become less competitive.
Now, it’s not like it’s impossible to get a deal done with an FHA loan. It’s just that, to do so, you need to be looking at less desirable neighborhoods where there is less buyer demand and where the prices are therefore lower. Good places to look include Boyle Heights, the southern part of Echo Park (south of the 101), some parts of Highland Park, and West Adams. And you need to be working with a team that has closed a lot of these kinds of deals.