2017 FHA Loan 3.5% Down Payment – The Basics

The Federal Housing Administration offers the infamous FHA loan. FHA loans are primarily known for allowing a low 3.5% down payment on 1-4 unit properties  – even as properties up to a $660,000 purchase price (in Los Angeles and Orange County). FHA loan limits vary per county.

FHA is also known as a first-home buyer program but FHA is not a first-time home buyer program. Lenders tend to market FHA to first-time home buyers because of the low down payment option, which is why people tend to think of it as a first-time home buyer program.

Owner occupied primary residences are allowed. Investment properties and second homes are not allowed.

FHA offers a 30-year fixed rate mortgage and a 5/1 adjustable rate mortgage.

FHA is more lenient on all credit related issues. Lower credit scores are allowed. It is true that FHA allows a minimum 500 credit score but practically speaking it’s rare that someone with a 500 credit score will qualify for a loan. FHA calls for a 3-year waiting period on foreclosures vs. the industry standard 7-year waiting period. Short sales, bankruptcies and loan modifications require a 4-year waiting period on average and FHA requires only 2 years.

Documentation requirements are pretty much the same for all loans including FHA.

One common misconception is that FHA loans take longer to close. This is 100% untrue. I’ve closed FHA loans is less than 20 days! The only reason that rumor exists is so lending institutions and loan officers can blame closing late on something.

Fun fact: FHA allows 3.5% down for a house, condo AND a duplex, triplex and fourplex. https://homeloananswerguy.com/2017/02/14/how-to-buy-a-2-to-4-unit-property-with-only-3-5-down.

Thinking about buying a condo or townhome using an FHA loan? Here’s a problem you might run into: FHA requires the entire condo project to be FHA approved! No FHA project approval. No FHA loan allowed. And most condo project are not FHA approved.

FHA loans tend to be more expensive than conventional loans primary because of the cost of mortgage insurance.

FHA loans require monthly mortgage insurance regardless of how much you put down AND the monthly mortgage insurance payment never goes away. Since 2013 FHA requires monthly mortgage insurance for the life of the loan.

Conventional non-FHA loans require monthly mortgage insurance only when putting less than 20% down AND the mortgage insurance goes away once 20% equity has been reached by either paying down the loan balance or the property goes up in value.

How does one get rid of mortgage insurance? Once 20% equity in the property has been reached one can refinance out of an FHA loan and into a conventional loan.

In addition to monthly mortgage insurance, FHA charges a one-time upfront mortgage insurance fee of 1.75% of the loan amount. This lovely 1.75% fee can be financed into the loan and is not required to be paid out of pocket but you are still paying for it.

I always say that FHA loans are great… unless you qualify for a conventional loan! Conventional loans require only 5% down up to a $445,000 purchase price so make sure to explore all available loan options. But if FHA is the only loan you end up qualify for, it’s not only a great option, it’s your best and only option.

The Impact of Solar Panels on Your Home


Residential solar is becoming more and more popular with peoples desires for independence from the grid and a greener lifestyle. Local and state governments are still offering incentives to install solar panels. Many new home construction builders include solar panels as an energy saving option. Solar may or may not become a major player in generating cheaper energy – only time will tell. What is the impact of Here are a few things to consider when looking at the property value impact of solar panels.

  1. Government incentives will not last forever.
  2. Solar panels can cost upwards of $20,000 and may be financed.
  3. Selling your property with financed solar panels? Financing agreement can be transferred to the new homebuyer or must be paid in full before or at the time of closing escrow. The best-case scenario is the new homebuyer loves solar panels and is willing to take over the financing agreement. Worse case scenario, the new homebuyer hate solar panels and wants the panels removed entirely before purchasing the property.
  4. What is the life expectancy of a solar panel?
  5. How much are maintenance costs?
  6. How much value do panels add to the value of the property?

Solar has a cool factor in my opinion but the cost is still fairly expensive. The government is betting big on solar panels, hoping solar panel technology will become more effective and cheaper in the future. With Porsche just announcing 50% of its production to be electric by 2023, it would appear our appetite for low-cost electricity is not going anywhere anytime soon.

Tax Deferred 1031 Exchanges – Is the End in Sight?

Tax reform is a hot topic in 2017. Donald Trump has identified tax reform as one of his top priorities and it is expected that house republicans will begin to push legislation looking to create visible changes to the tax code. Is the end in sigh for tax deferred 1031 exchanges?

Lawmakers are eyeing bills to change the current tax code including abolishing the much loved 1031 exchange, a section of the tax code which allows for the deferment of taxes when selling a property if a similar property is purchased.

Here are a few things you should know about section 1031 of the internal revenue code:

  1. A 1031 exchange allows taxes to be deferred in something called a property swap. A seller can defer any taxes owed on a property sale by purchasing another property “of like kind”. Gains accrued from the sale of the property are not recognizes immediately. Instead the gains are deferred until the (new) replacement property is sold, at which point the cash will be taxable.
  2. Property swaps are popular among smaller entities. Individuals with rental properties, or small real estate companies commonly use a 1031 exchange to use pre-tax profits to help purchase new properties.
  3. People disagree on the impact of the policy change. Those who want to remove the 1031 exchange section from the tax code see it as a simple tax loophole benefiting the rich. Removing the section would create immediate financial gain for the government, potentially allowing for other taxes to be decreased.
  4. Proponents of the deferment point to the fact that decreasing tax liability for those involved in trading real estate means that they then have more capital to spend on improving the properties. Not only will the removal of this provision mean that fewer sales occur overall, but that once the sales have been completed, there will be less spending on other areas, which increase the value of the property and support local business.

The 1031 exchange tax law always made sense to me. Sell a property and use the gross profits towards purchasing a new property and pay taxes when you cash out and in the meantime add liquidity to the market. No law is perfect but most people seemed to favor this one.