FHA 203k mixed use.
If you are a mixed use building owner with no more than 4 residential units or are considering buying a mixed use building you will want to read this.
I’m not going to say it was easy but after 7 months of hard work and the help of my mortgage broker I was finally able to close a FHA 203k mixed use refinance with a fully amortized 30 year fixed loan with a 4% interest rate!
Very few people realize it is possible to get a 30 year fully amortized loan on mixed use property, and it is information I am sure many mixed use building owners would love to know. I have owned my mixed use building for 6 years, and have had two commercial loans in that time. Both were interest only loans, which means I wasn’t paying down the principle, and after the fixed period I would owe as much as I did on the day I first got the loan.
What’s the importance of being able to get a 30 year fixed loan as opposed to a commercial loan that comes due in lets say 5 years?
Let’s suppose the principle amount borrowed on a 5 year fixed commercial loan is $1,000,000 with an interest rate of 6%, and it is fully amortized over 30 years:
On day 1 the monthly payment will be $5,995.51 with just $995.51 going towards principle and$5000 going towards interest. After the first payment the total amount still owed will be$999,004.49.
5 years later the total monthly payment is still $5,995.51, the amount going towards principle is now$1,336.11, the amount going towards interest is $4,659.40, and the total principle amount still owed is $930,543.57.
In those 5 years the total interest paid is $290,273.88 while the amount of principle paid is just$69,456.43! If you strung together 6 of these 5 year loans you will have paid $1,741,643.28 in interest, and still owe $583,261.42 in principle.
On the other hand with a 30 year fixed loan such as the FHA 203K mixed use loan the total interest paid over the life of the loan is $1,158,381.89, and after the 30 years is complete the principle amount owed is O (Zero).
The FHA 203K mixed use loan product is not for everyone, and here is why:
- There must be an owner occupier on the loan.
- The building cannot have more than 4 residential units (5 unit buildings are ok if the fifth unit is commercial)
- The highest loan amount is $1,400,000. The borrower can bring money to the table in order to purchase a more expensive building.
- The closing costs are very expensive including, but not limited to, a percentage point at closing, and slightly over 1% per year for mortgage insurance regardless of the loan to value ratio. (in my case the loan to value is 60% and I still need to pay mortgage insurance for 5 years).
- The appraisal is tough, and there are many reasons why a building may not qualify.
- The borrower’s finances must be completely documented. The underwriter will want to know everything, and more. I had a note that I had paid off, the owner of the note signed and notarized the reconveyance, and still the underwriter wanted a letter from the lender explaining the money had been paid back!
Have an interest in buying or selling San Francisco mixed use property? send me an email, or give me a call, I’ll be happy to talk to you about the best way to get in the market.