The mortgage insurance never came off when I moved out, which ate the deal

First house, 3 bed ranch from the seventies in a mid-priced suburb, $268k, 3.5 percent down on an FHA loan, so $9,380 down and about $7,000 in closing costs. Full payment was $2,140 a month, and $205 of that was the monthly mortgage insurance premium.

My plan was the standard one. Live there a year, move out, rent it, buy the next one. The part I got wrong was assuming the insurance would drop off once I had 20 percent equity, the way I'd read about on other loans. That's not how my loan worked, and my loan officer told me so only when I called at month 13 asking how to get rid of it. Dropping it meant refinancing, and by then I'd already moved, so any refinance would price as a non-owner-occupied loan. The quote came back roughly a point higher than what I had plus about $4,600 in costs. My payment would have gone up.

So I rented it at $2,175, which is $35 over the payment and well under water once you set anything aside for repairs. I held it seven months at about negative $180 a month in real terms, ate one vacancy month at turnover, and then sold in the spring at $279k. After commission, concessions and a small repair credit I cleared a little over my original down payment. Adding the negative months, the turn, and the moving costs, I'm out about $9,800 on a house that appreciated $11k.

What I'd do differently: underwrite the payment I'd be stuck with permanently, insurance included, and ask the lender in writing before I sign which product lets that insurance come off and what has to be true for it to come off. I underwrote the payment I had in year one and assumed year two would be cheaper.

Answer

1tashaford30PB2APRO7

rigging, no. Low down payment owner-occupant financing is the reason this strategy exists. What tally hit is that the premium on a low down payment loan is part of the payment forever on some programs, so it belongs in the year-two numbers, not just the year-one budget.

The way I'm setting up my own first purchase after reading this thread:

Before I pick a loan, I ask the lender in writing two things. Under this exact program and down payment, what makes the mortgage insurance end, and if nothing does, what does the payment look like for the life of the loan. Then I run the conversion at that number.

Then I underwrite the rental year with sextant's haircuts, 5 percent vacancy and 8 to 10 percent maintenance on an older house, and I want the result positive before I sign anything. If the premium is permanent and the deal only clears with it stripped out, it's the wrong house rather than the wrong loan.

There are also conventional owner-occupant products with lower down payments than investor loans where the insurance is cancellable at an equity level, which is a real tradeoff against the FHA down payment. Terms and thresholds change, so confirm the current ones with your own lender rather than with us.

tally, the $9,800 bought a lesson most people pay for on property two or three, when the negative carry has a portfolio behind it.

6 replies

1diane_kowalskiPassivePRO9

I made the same assumption last year while I was reading, and someone corrected me. Whether the insurance falls off at an equity threshold or sticks around for the life of the loan depends on the program and on the terms in your specific note, and it can turn on how much you put down at origination. It's a one question conversation with the lender and I'd get the answer in an email, not on a call.

1renee_dubois Get yours

The insurance is $205 and your gap to rent was $35. Take the insurance away entirely and you're at $240 a month over the payment, which still won't cover a water heater and a turn, never mind a month of vacancy in an average year. The house looks like it was too thin at purchase to me, and the premium is what made a thin thing visibly bad. Every unit I own that works has more room than that between rent and payment on day one.

1dpatel_reCS4A

cairn has the arithmetic right. Underwrite at the payment that survives your move, then subtract reserves before you call anything cash flow. On $2,175 rent I'd hold back roughly 5 percent for vacancy and 8 to 10 percent for maintenance and capital items on a fifty year old house, so call it $280 to $320 a month off the top. Against a $2,140 payment you were around negative $250 to $290 from the first day of the lease, and the premium was $205 of that.

The refinance quote is the other thing worth understanding before you buy rather than after. Once you've vacated, a rate and term refinance prices as an investment property, and the appraisal is a live risk because you no longer control the comparison set. Any plan whose second step is "refinance out of this later" is a plan with a rate assumption and an appraisal assumption inside it, and neither one is yours to control. If the deal only works after that refinance, it doesn't work.

The part you did right was selling before it compounded. Seven months of negative carry is tuition. Three years of it is a decision.

3nicole_adeyemiPassivePRO5

I'd push back on the selling being right, at least as a general rule. You realized the loss at month 20 in exchange for stopping a $180 monthly bleed, and you gave up the loan itself, which was the cheapest money you'll ever be offered on that house. On my land holds the whole return comes from being willing to be bored for a long time. Rent moves and the fixed part of your payment doesn't. Whether waiting made sense here depends on how fast rents move in that submarket and whether you had the cash to feed it without touching the next purchase. Sounds like you didn't, which is a real answer, just a different one from the house being bad.

1megan_doyle15 Get yours

So does this mean an FHA loan is the wrong tool for this whole strategy? That was the piece I thought made it work at all.