House Hack Expensive Market

[Laura A Walters]

So in an expensive market (Seattle), David suggested house hacking.  I've never done that and am a single income buyer.  My question is, when I look at multi-family properties, they are priced above what I qualify for in a single family home.  Does the bank or lender consider on a multi-family (duplex, etc) that you will be renting part of the property to help cover the loan payment?

Thanks!  And sorry if this has been covered before. Still combing through all the forum posts!

[Michael Haas]

Good question @Laura A Walters - Covid has turned lending rules on their head, but typically lenders will allow you to count 75% of rental income from the units you'll be renting towards your income for loan qualification. This is only for multifamily properties - if you're househacking a single family you will have rental income from the other bedrooms / basement, but the lender won't be able to count that income towards your qualification.

To give you rough numbers, if you qualify for a $500,000 single family house with 5% down (conventional) you'll likely qualify for a $650,000 multifamily house with 3.5% down (FHA). Keep in mind, true multi families tend to be more expensive than comparably sized single families or single families with ADU's, so although you're approved for more $ its also easy to spend more $ on these properties.

You'll also want to consider the difference between a low down-payment conventional loan (5%) and a FHA loan (3.5%, I'd only recommend this loan for purchasing multi families) Since 2014 new FHA loans at 90% loan-to-value or less (more than 10% down), have the monthly mortgage insurance premium payable for at least 11 years. For new loans at more than 90% loan-to-value (less than 10% down), the monthly mortgage insurance will be payable for the life of the loan. Essentially, if you buy a house with a FHA loan you'll want to refinance into a conventional loan 3-5 years down the road, which means additional costs (loan origination fees) and risk that your interest rate will go up (it certainly won't go below the 2.8% we're seeing today!).

I know its a lot, but it isn't as complicated as it seems after you'd done a few deals yourself or if you have a good, investment focused agent in your corner. Feel free to hit me up on messages if you'd like to grab a coffee and unpack this in a bit more detail. Cheers!