Thinking of buying a 2 flat in Chicago, and want to know about the different loan options available to you? Buying a 2 flat is actually a pretty simple process, as you can use pretty much the same options as you would if you were buying a single family home. In fact, buying a 2 flat may be easier, because you can use the estimated rental income to qualify for more money! Below are some of the loan options available to you.
Conventional Loan
The first loan option to consider is a conventional loan. This is your everyday, plain old fashioned loan. However, you don’t have to deal with that 20% down payment like in the past. There are now lenders out there with down payments as low as 5%. That isn’t bad considering that the high down payment is usually the only downside of this loan option.
There are many benefits when using this option. The most important benefit is that sellers highly prefer this option when compared to other options. Besides having all cash, this is pretty much the most preferred option for sellers. With convention loans, you don’t have to worry about passing an FHA inspector. Also, convention loans tend to close faster then FHA loans by 2-3 weeks, helping you get into your property as fast as possible.
Another benefit is that interest rates for conventional loans are lower than FHA loans, which means lower mortgage payments. Conventional loans also do not have mortgage insurance, which can easily $100 to your monthly payment. Bottom line: the conventional loan may cost more upfront, but your monthly mortgage payments will be a lot cheaper.
FHA Loan
This is the first time home buyer program that you hear so much about. With an FHA loan, it is possible to buy a property with a low down payment of only 3.5% of the purchase price. Also, with an FHA loan, your credit score doesn’t need to be as high in order to qualify. As long as your credit score is 580 or higher, you can qualify for an FHA loan. This is a great loan program that help a lot of people get their first property when they otherwise would not be able to. Even better, you can use it you get a multi-unit property of up to 4 units!
There are some downsides to using an FHA loan. First, you have to occupy the property, so you cannot use it to buy a property and fully rent it out. You have to reside in one of the units. Also, FHA requires you to live in the property for a certain amount of time (at least a year, maybe more depending on your lender). So if you were planning to buy the property, fix it up and sell it quickly, you cannot use this loan option.
Next, your monthly mortgage payments for an FHA loan will be higher than when compared to a conventional loan. The reason is because all FHA loans are required to have what is called private mortgage insurance, or PMI. Also, interest rates are higher when you use an FHA loan than conventional loans.
Lastly, when you buy a home with an FHA loan, the home must be able to pass an FHA inspection. FHA requires that home must be in move in condition, and cannot have any safety issues. This can be anything from a leaky roof, a leaky basement, leaky pipes, peeling paint, etc. If there are any issues found, the loan will not go through unless these issues are fixed. This limits the buying power of anyone with an FHA loan, because there are a lot of homes out there for sale that won’t pass an FHA inspection.
FHA 203K
FHA does have a loan option designed for homes that won’t pass an FHA inspection: the 203k loan. With a 203k loan, the lender will not only lend you the money to buy the home, they will lend you the money needed to do the repairs as well. This is a great option for those who were looking to buy a fixer upper for themselves, but don’t have the cash to fix it up themselves.
For example, say you find a home for sale for 100,000, but the home needs repairs, such as a new roof and a new furnace. A home like this would not be able to pass an FHA inspection. However, with a 203k, the will not only lend you the money to buy, they will lend you the money to replace the roof and furnace as well. It will all be combined into one loan and one mortgage payment.
The FHA 203k is not for the faint of heart however, as there are a few drawbacks to it. First, the repairs must be approved by an FHA inspector. This means that you may be forced to make some repairs that otherwise was not in your original budget. For instance, maybe you only planned to fix the roof and replace the furnace. The inspector can show up tell you that the entire back porch needs to be replaced as well. That is a huge expense to add on if one isn’t prepared for it.
Another drawback is that the contractor you use to make the repairs has to be registered with the FHA 203k program. This means that it can’t just be your local handyman who you trust to make all the repairs. On top of that, you will find that a lot of contractors to not like to work with the 203k program. The reason is because the 203k only pays the contractor after the work is started, meaning that the contractor has to use their own money at the beginning. All of this makes it very frustrating to find a contractor who is qualified and willing to work with 203k loans.
IHDA Grant
The IHDA grant is a grant that helps home buyers in Illinois with their down payment and closing costs. If you meet the requirements, you can qualify for up to $10,000 in closing cost assistance! To learn more about this product, check out the website here.
If you have any questions, or need help buying or selling a home, feel free to reach out to me via my website at Baileyacresproperties.com. Thanks and have a great day!