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November 2014

3% down FHA loans have a downside

A Recent Purchase Creates a Problem When Job Transfer Notices Arrive


I received a call from a seller experiencing some distress. Her and her husband decided in the summer of 2014 to purchase their first new house. They felt confident in their employment situations and decided to buy near their home town. They chose a brand new house and paid $295,000 and secured a $289,656 FHA loan. The problem with this 3% down loan is that the day escrow closes, there is no equity which would allow the new owner to sell without writing a check and most of these first time home buyers don't have 'extra' money to spend on a sale.


Well, one year after they close, they both received notices they were getting job transfers to a location much to far to commute. Their monthly payment is $2,304 PITI, but market rent is only $1,950. It certainly doesn't make any sense for inexperienced homeowners to become landlords spending money every month to protect a zero equity position.


The wife called me and I took a look at the numbers. The best I could offer was a subject to purchase and the possibility of paying off the loan when the house is sold for a profit in the future. Personally, this deal doesn't make sense for me and my goals. However, I know plenty of landlords with piles of houses, lots of cash flow and in need of more depreciation to offset their income.


I called one of these landlords and asked him if he would be interested in upgrading his portfolio. He emphatically replied that he'd be very interested in getting the deed to a brand new house with financing. We opened escrowed and completed the deal. The sellers were able to get a little bit of cash to help with their moving expenses, my landlord buyer got a brand new, excellently financed house to add to his portfolio, and I received a $10,000 assignment fee for my services.