Special offer

Creative FHA: Skip the Big Down Payment and Build Equity in Your Fixer

Mortgage and Lending with Platinum Home Mortgage Company NMLS #238304

Earlier this year a young lawyer bought a pre-1900's fixer in San Francisco. She had over $200,000 in the bank and yet chose to use a regular FHA loan with a 3.5% down payment.

At the same time, east of San Francisco, another run down house was being purchased in an affluent suburban neighborhood. Again, the engineer with a PHD and his pharmacist wife had plenty of money for a down payment, but instead chose FHA for to keep the down payment to the bare minimum.


Both buyers realized this: By making the minimum down payment and using the cash to fix the house they could:

  1. Generate equity in the house quickly by maintaining their liquidity for the fix up 
  2. Have just the house they wanted, appointed in their taste
  3. Have a bigger write off from a bigger loan
  4. Eliminate the need to tack on an equity line or other loan which would appear as "revolving credit" on their credit report

But didn't this "cost" them because they had to pay mortgage insurance on the FHA loan? Well, yes. But the increase in value from the fix up far exceeded the mortgage insurance cost. So mortgage insurance was a "carrying cost" of the project.

But wasn't it difficult to get an FHA appraisal on fixer properties? Not as difficult as most agents believe. The holy grail for an FHA appraisal is SAFETY and LIVABILITY. An FHA appraiser does not care about outdated kitchens, master bedrooms painted lime green or "smells". But if there is a missing window, or ripped out bathroom, then that must be fixed.

Note: Most common repair on my FHA loans is peeling paint (on houses old enough where this could be lead paint).

Both couples eventually refinanced out of the FHA loans by flipping their financing into a conventional loan to eliminate monthly mortgage insurance. They were able to do this because they had generated 20% equity via the fix up.

I will grant you that the market helped them along since rates sunk lower, and values inched higher.

Take away: FHA loans are not only for first time buyers with limited cash. As long as buyer intends to occupy the property, an FHA is a way to fund a fixer by leveraging the cash that would have been used for the down payment.

NOTE: In San Francisco and the surrounding counties the maximum FHA loan amount is $729,750 for a single family home or condo. Please check with your mortgage professional for the FHA loan limit in your area.

Written by Janet Guilbault, Mortgage Banker for RPM Mortgage in the San Francisco Bay Area

NMLS # 238304


Janet Guilbault


Mary Bowen
Coldwell Banker United, Realtor - The Woodlands, TX
Real Estate At Its Finest!!!

another great way to use the FHA mortgage as a tool.

Aug 13, 2012 11:36 PM
Jennifer Monroe
Indigo Home Team powered by Compass - Charlotte, NC
Real Estate REALTOR®/Broker/Designer

I was about to hit the 'suggest' button as I finished the final paragraph only to discover one of the 'AR gods' was smart enough to catch this excellent post. This is the kind of financial perspective that is much needed in the marketplace today. With all of the short-sale/bank-owned properties available that are merely victims of deferred maintenance and upgrades - this is an excellent option for those enterprising and financially fit buyers. Love this!

Aug 13, 2012 11:50 PM
NoCo Home Team
C3 Real Estate Solutions - Fort Collins, CO
Sell Smart, Buy Wise & Live Well in Nrthn Colorado

Great post, Janet and very true. We're doing something similar with a construction portfolio - using FHA to keep more liquid and then will refi once our equity is up.  I'm sure your clients appreciate your knowledge of how to help them leverage their loans.


Aug 14, 2012 12:01 AM
Tracy Oliva
West USA Realty - Arizona - Fountain Hills, AZ
The Oliva Team Arizona Agents

Janet: WOW!!!!!!!!!!!!!!!!!!!! How true this is,  great post,  keep up the good work and good luck with your business.  E

Aug 14, 2012 01:34 AM
Janet Guilbault
Platinum Home Mortgage Company - Walnut Creek, CA
San Francisco Bay Area Direct Mortgage Lender

Sharon, all agents were overwhelmed with doubt when the lawyer announced she was doing an FHA. Luckily, the seller was Wells Fargo (REO) and took it all in stride (Wells also loved how overly qualified the buyer was!)

There was some repainting and some broken windows called for in the appraisal. No biggie!

Jason: These are all regular FHA loans NOT 403K loans (where costs to rehab are encompassed in the loan)


Aug 14, 2012 02:08 AM
Janet Guilbault
Platinum Home Mortgage Company - Walnut Creek, CA
San Francisco Bay Area Direct Mortgage Lender

Ginny: More than being a believer in FHA I am a believer in liquidity. If buying is all about location, location, location, then lending is all about leverage, liquidity, and long term.

Long term because you want to be sitting in the exact right place with your mortgage when rates rise (and say, wow, thank you, Janet, for putting me in this 3.75% fixed rate loan)


Aug 14, 2012 02:12 AM
Nan Jester
Exit Real Estate Gallery Jacksonville Beach, FL - Jacksonville Beach, FL
Realtor, Exit Real Estate Gallery

FHA has a wonderful place in this market place.

Aug 14, 2012 02:57 AM
Harry F. D'Elia III
WEDO Real Estate and Beyond, LLC - Phoenix, AZ
Investor , Mentor, GRI, Radio, CIPS, REOs, ABR

It is ok to use the FHA program and leave money in the bank, A buyer can always pay down their loan down the road.

Aug 14, 2012 04:01 AM
Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi
NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 - New Lenox, IL
708.921.6331 - 40+ yrs experience

Janet:  Fantastic food for thought presented within your post ... on SO many levels.  You prove that mortgages are NOT a one-size-fits-all commodity.  Thank "thinking outside of the box" can gain you much.  You also prove working with a mortgage lender that truly advises you regarding all your options is vital to your financial health and future.  Again ... unbelievably good, sound advice given here ... and you prove your worth as a professional beyond a shadow of a doubt ...


Aug 14, 2012 06:12 AM
Janet Guilbault
Platinum Home Mortgage Company - Walnut Creek, CA
San Francisco Bay Area Direct Mortgage Lender

Hello Gene,

Thanks first of all for the nice words and thoughtful comment. Do people really crank out loans without giving borrowers options? That sort of takes all the fun out of doing mortgages, don't you think? (Did I just use the words fun and mortgage in the same sentence?)

I can't help but get excited when I think of all the opportunities that are out there right now for buyers. The most difficult barriers to home ownership are cash down and qualifying with depressed wages. FHA allows so many to seize the day and buy now.


Aug 14, 2012 06:30 AM
Reba Haas
Team Reba of RE/MAX Metro Eastside www.TeamReba.com - Bellevue, WA
Team Reba, CDPE

With rates being as cheap as they are, there isn't a better time to do a rehab loan like the FHA 203k or any other similar loan product. The biggest challenge is getting a buyer who is willing and able to "see" the end product and wait through construction.

Aug 14, 2012 08:00 AM
Paul McFadden
Responsive Pest Control - Seattle, WA
Pest Control, Seattle, WA.

Janet: Great and interesting thoughts. Thank you. It's good to see you here again. Did you go away for a while?

Aug 14, 2012 08:03 AM
Donna Harris
Donna Homes, powered by JPAR - TexasRealEstateMediationServices.com - Austin, TX
Realtor,Mediator,Ombudsman,Property Tax Arbitrator

Great examples of the use of an FHA loan. I find it interesting that people still refer to it as the "first time home buyer loan" even though almost anyone can get it if they're within the price limits in their area.

Aug 14, 2012 08:17 AM
Janet Guilbault
Platinum Home Mortgage Company - Walnut Creek, CA
San Francisco Bay Area Direct Mortgage Lender

Paul, was not out of the mortgage business but was gone from AR for awhile. So nice to be back.

Reba: Buyers with vision are pretty rare but I have a Realtor who always shows a house with contractor in tow!

Donna. I know that the old FHA loan is still considered something for a first time buyer. But we have first time buyers here that are pretty sophisticated and buying pretty expensive houses.

Aug 14, 2012 08:39 AM
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

Janet - This is a great creative way to get the home you want with other perks and gives people more options.

Aug 14, 2012 04:13 PM
Kevin Hancock
Evergreen Home Loans NMLS 3182 - Poulsbo, WA
The Hancock Mortgage Team

Great post Janet!  Creativity and knowledge go a long way!

Aug 29, 2012 02:36 AM
Mike Young
203kOnLine.com, covering the USA - Stallings, NC
FHA 203k Consultant 916-758-1809

you did a great job in contrasting the two buyers. We work with renovation loans exclusively on the consultant side and this is one of the best posts I've seen, I like the way you put it together. very nice job.

Sep 20, 2012 01:11 AM
Bill Nazur
First Lending Solutions - Riverside, CA


Gotta say....I've been away, but it is refreshing to come back and see you're back to writing. As always, great information.

Apr 17, 2013 05:47 AM
Bill Roberts
Brooks and Dunphy Real Estate - Oceanside, CA
"Baby Boomer" Retirement Planner

Hi Janet, I hope I'm not too late to comment.

What about using an FHA 203(k) or an USDA loan to conserve even more cash?

Bill Roberts

Sep 28, 2013 04:45 AM
Merline D Pennant - New homes, Short Sales and Pre-foreclosures
Regal Realty of the Treasure Coast LLC - Port St Lucie, FL
New City, New Towns, New homes

I try to explain this to y buyers all the time.  Many look at me like I am crazy.  They just want the prefect house.

Nov 15, 2013 10:57 PM