2, 3, or 4-unit for first househack?

Question

Hello BP, I am currently looking to buy my first multifamily property in which I will house hack and I plan on living there for the 1 year minimum requirement then buying another multi-unit property to do the same. I have had 2 investors tell me that lenders will not let you "move up" in unit size for your next house hack. For example, going from 2 units for your first property to 3 or 4 units on your second property because in the lenders mind you are most likely going after the cheaper owner occupied financing.

I have already been pre approved by a lender in which I intend to use and I told him about my plan for house hacking a second property and asked him about this situation and he said there would be no problem with me obtaining owner occupied financing on the second property. One investor told me that the lenders do not like to talk about this subject. I feel like a response to this question is somewhat negotiable or persuasive and may vary from lender to lender, but then again have never experienced this before so I'm just guessing. Maybe I could offer to let my lender visit the property unknowingly so that he can see that I am in fact occupying it, or especially if I am moving out of state, etc.

I am very interested in hearing about possible solutions to this "problem", as well as personal experiences if anyone has dealt with this situation.

Thank you, Sebastian.

Sebastian Roy · Answer

@Craig Curelop I agree, I think it is ridiculous too.What they mean is that a lender would think I am just trying to get cheaper financing and I won't actually be living there, as stated. For example, the lender thinks there is no legitimate reason why I would go from a 2 unit to a 4 unit with more tenants, less freedom, etc. I've only heard this from a few people, most say I should have no problem and besides I have already approved this with my lender, I just didn't want to trap myself on my first property. I am also aware that you can only have 1 FHA loan at a time.

By the way, I am currently reading your book "The House Hacking Strategy" and have learned so much from it, Great book!

Thank you, Sebastian.

Sebastian Roy · Answer

@Calvin Ozanick exactly. I mentioned to my lender that I am planning on house hacking a second property and he had no issues with it, he actually said he has had a lot of investors do that. like you said if your honest and a good client I don't see why there would be a problem, especially if you had a legitimate reason -closer to work, more square footage, bigger yard, etc. Thank you for your input!

Sebastian Roy · Answer

@Joe Splitrock Great advice, I will check out the link you sent. Thank you!

Bill B. · Answer

You simply need a reason you’re moving. I had a neighbor tell me I was lying about moving from one SFR to another as I planned to rent out my current primary. The lender I replaced them with gave me a sheet of acceptable reasons...

Closer to work, school, pool, bigger house, smaller house, bigger garage, more bedrooms, newer house, etc...

Just tell the lender why you want to live somewhere else.

Craig Curelop · Answer

@Sebastian Roy - This is one of the most ridiculous things I have ever heard here on BiggerPockets. If these investors, agents, or whomever are telling you that you can't purchase as duplex and then one year later purchase a triplex, they are completely misinformed.

What they might be getting at is that you can only have one FHA loan out at a time. So if you wanted to close on a duplex today, in order to purchase a triplex one year from today, you would need to refinance the FHA loan to a conventional mortgage to free up the FHA so it can be used again.

Jon Reed · Answer

It sounds like your investors do not know what they are talking about. They probably heard of one story from one bank that didn't let someone go from a 2 unit to a 4 unit. You are approaching this correctly and not just relying on your investor's input.

Go and talk to 3-4 different local lenders in your area and ask them these questions. Ask them if they would lend to someone who is moving out of a 2 unit and into a 4 unit. Ask them what reasons are perceptible for moving out.

If you come across a lender who 'doesn't like talking about things' then kick them to the curb and find a lender who is on board with your plan and wants to see you succeed.

Joe Splitrock · Answer

@Sebastian Roy you may be misunderstanding the issue that investors are trying to convey. If you are using conventional financing, it really isn't the lenders decision. They go by underwriting standards set by Fannie Mae or Freddie Mac. You can have up to ten mortgages. No issue there.

It may be the type of loan program that could be an issue. Any FHA backed loan has restrictions to only one FHA insured loan at time:"To prevent circumvention of the restrictions on making FHA-insured mortgages to investors, FHA generally will not insure more than one principal residence mortgage for any borrower. FHA will not insure a mortgage if it is determined that the transaction was designed to use FHAmortgage insurance as a vehicle for obtaining investment properties, even if the property to be insured will be the only one owned using FHA mortgage insurance."

https://www.hud.gov/sites/documents/4155-1_4_SECB.PDFEven if you live there for one year, it doesn't matter. You can still get another owner occupied mortgage, but you need to use conventional financing.

There are exemptions to the FHA rules, but don't lie to meet one of them:

Relocation (new job outside commuting distance)

Increase in family size (number of dependents increases)

Vacating a jointly owned property (divorce or break up)

Non-occupying co-borrower (you are buying your own place but are a co-borrower)

As you can see these reasons are very specific. It works if you are moving around for your job, have kids or get divorced. That is about it.

I don't follow people who are talking about lender relationships? FHA is a federal program and conventional mortgages follow standard underwriting rules. The loan processor can't just make up their own guidelines unless they are holding the loan.

To summarize, you can get more mortgages but you may not be able to take advantage of FHA programs to do so.

Calvin Ozanick · Answer

I think it all just comes down to communication. If you talk through your intentions from the beginning, while also being upfront when that time is coming, it should not be an issue. We have built so many relationships with lenders here and it is very easy to work through these deals. I also would say that if you have been a good client on the first mortgage, a lender would have no issue entering into another mortgage agreement with you.

Sebastian Roy · Answer

@Max T. Thanks for the input! A 4 plex would certainly be ideal, but they are few and far between.

Sebastian Roy · Answer

@Brittany Washington I have heavilyconsidered using a property manager after reading Ken Mcelroy's "abc's of property management" but i decided it is probably best to self manage my first few properties so I can get an understanding of it as well as learn how to manage future property managers as I plan on hiring a manager in the future.

2, 3, or 4-unit for first househack?

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