House Hack: Conventional or FHA loan?

26 Replies

Hello all,

I have purchased a few properties for investment, but am looking to finally have a primary residence. I have found a quadplex that I plan on house hacking and was originally going to get an FHA loan on the property as that is what I have always heard. In talking to a mortgage lender she was saying that with the insurance FHA charges, and the PMI, it may be better to get a conventional loan as the rates for FHA and conventional are very similar (4.375%, 4.5%). I do have 20% I could put down for the conventional, but wondering if it would be better to save some of that money to put into other deals/investments? In running the numbers through the BP calculators, the conventional gets me better cashflow, but the FHA has better Cash on Cash.

Thoughts?

@Jonathan Jordan look into whether you can qualify for the 5% down conventional loan. Most of my clients in the Berwyn/Brookfield area here do 5% down conventional loans for their first house hack, and then they do a second one with the 3.5% down FHA. The 5% down conventional loan is one of the biggest "cheat codes" that is out there in my opinion!

@Evan Smeenge you can absolutely use the 5% down conventional loan. The loan is an owner occupant loan, so it can really only be used by those who are house hacking. I find that this is almost always the better loan product as long as the area and buyer qualify. The census track is the determining factor in whether or not you can use the 5% down loan. Most of the areas where my investor clients are finding deals allow for the use of the home possible loan though. 

Thank you @John Warrenthe insights I have been reading up on house hacking a quadplex in the Denver area and am not a fan of the FHA PMI forever constraint. Are there any other restrictions that differ from the FHA? i.e. Must live in the house longer than 1 year? Thank you kindly for your response.

@Preston Freeman I have clients here in Denver Metro who use 3% conventional loans to purchase their house hacks. As @John Warren mentioned it is an owner occupied loan and you must have the intention to live in the property for 1 year. PMI goes away once you have 20% in principle paydown or equity. Besides that it's pretty strait forward.

Originally posted by @Jonathan Jordan :

Hello all,

I have purchased a few properties for investment, but am looking to finally have a primary residence. I have found a quadplex that I plan on house hacking and was originally going to get an FHA loan on the property as that is what I have always heard. In talking to a mortgage lender she was saying that with the insurance FHA charges, and the PMI, it may be better to get a conventional loan as the rates for FHA and conventional are very similar (4.375%, 4.5%). I do have 20% I could put down for the conventional, but wondering if it would be better to save some of that money to put into other deals/investments? In running the numbers through the BP calculators, the conventional gets me better cashflow, but the FHA has better Cash on Cash.

Thoughts?

Use FHA, Fannie Mae, Freddie Mac mortgages for low down options. Once you have 80% LTV refinance out. The below forum is great for lenders etc people sharing their rates.

 https://www.bogleheads.org/for...

Originally posted by @John Warren :

@Evan Smeenge you can absolutely use the 5% down conventional loan. The loan is an owner occupant loan, so it can really only be used by those who are house hacking. I find that this is almost always the better loan product as long as the area and buyer qualify. The census track is the determining factor in whether or not you can use the 5% down loan. Most of the areas where my investor clients are finding deals allow for the use of the home possible loan though. 

I am also curious about this. I am in the Seattle area and have been contacting a lot of lenders and so far all of them have said that even owner-occupied for a conventional is 15% down on a duplex and 25% down for a 3-4 unit. FHA still works with a 3.5% minimum down but was hoping I could do a 5% down on a multi-family.

Is it possible I am not asking the right questions to the lenders?

@Drew Whitmore talk to a lender to be sure, but in Seattle you'll likely have to be lower income to qualify for 5% Down conventional on a multifamily owner-occupant loan. For most clients earning decent wages 3.5% FHA or 15-25% conventional are the only owner occupant options for true multifamily properties.

Happy to introduce you to a great lender who can figure this out for you - just message me if that's something you'd be interested in. Cheers!

@Drew Whitmore , that is right, it is either 3.5% FHA, or 15-25% for small multi-family. This is why we house hack or use creative strategies like ADU, DADU, Mother-in-law, rent by room, ......

Having a decent ADU may generate a decent cash flow, or offset your mortgage significantly while still putting 5% down. The cities of Seattle and Tacoma also allow non-owner-occupant ADU. So you may be able to rent one single-family to two small families or two young professionals separately.

I have a property with ADU in Seattle.

Feel free to reach out if you got questions or comments and we can discuss more.

Thanks,

Pretty much anywhere you go to house hack, you would get an owner-occupied (non-investor) loan that's conventional or FHA at 3.5-5% for the lower interest rate (2.5-4% depending on your credit score as of October 2020). Even when you move out after a minimum of 2 years (to save on capital gains tax in case you want to sell within 5 years) to your next house hack, you can get another owner-occupied loan on your new house hack. Your original loan stays the same for the first house...it's not like they increase your interest rate on your mortgage just because you moved out to buy another place.

I would actually shop around at least 3 different lenders and ask them for printouts of FHA vs Conventional, in addition to the BP calculators, so you can compare them side to side to see who actually gives you the best deal per your criteria.

Are you currently working with a real estate agent? If not, I can recommend one to you in your area so you may take advantage of Keller Mortgage (through Keller Williams). They shop their loans to 15 different lenders for the lowest rates and give you $1k towards closing with a loan of 150k or more.

In my opinion, a good agent should also be sharing these things with you to make sure you can get the best win-win deal as their client.

@Drew Whitmore unfortunately, the game changed last July and the 5% down conventional got a lot harder to use in most markets. I no longer even bother recommending this to most clients as here in Chicago the numbers just won't work for a 2-4 unit. 

A client of mine recently in CT was able to obtain a low down conventional owner occupied loan with no PMI. It was a program his bank offered. May be worth looking into .

There are two problems with FHA loans:

#1 sellers don't like them. Every time we have multiple offers VA and FHA loans usually go to the side. The risk of the FHA appraiser stipulating a bunch of repairs a week before closing is too great. Most typical: exterior paint, also roofing, electrical.

#2 FHA loans make you pay PMI for the life of the loan

Conventional loans start at 5% for 30 years fixed with PMI and I have a lender here in Milwaukee that will do 5% down with NO PMI on a 5 year ARM portfolio (in house) loan, which is what most of our houe hackers choose.

From a sellers point of view there is not that much tangible difference between an offer with a conventional loan and a cash offer, as long as the pre-approval is solid and not just self reported income.

Buyer's often underestimate how important the credibility of the lender is when presenting an offer! It sucks for the listing agent to loose a deal on financing last minute, because the lenders PA was not good. I have seen that too many times with Wells Fargo, Chase, Quicken loans etc. and cringe every time when I get an offer using them. If you have to go back on the market now you get one offer at or below asking price, before you had 5 over asking to choose from. Any listing agent who has been through this will advise their seller accordingly.

I would favor a slightly lower offer from a reputable local bank over a higher offer from a lender I have concerns about their performance. Especially if another purchase hinges on the deal and a bad lender has the potential to kill both.

Does your loan officer know you are considering a quad? The maximum CLTV's are different depending on the number of units. Google "Fannie Mae Eligibility Matrix" to see what the requirements are in terms of CLTV, minimum FICO score, & # of months of piti (principal & interest, taxes & insurance) after closing. I would put the link here for you, but it comes up as a pdf. You want to familiarize yourself with the requirements as you decide on your next move. Fannie & Freddie generally have the same requirements.

One way to go, within the CLTV limit, is to get a heloc (home equity line of credit) that you only use if you need it for your next purchase. In the meantime, you have a larger downpayment - and a better cashflow on your primary.

I used conventional 3% down, first time home buyer loan (single family only). FHA works for low DP too, but FHA loans are less competitive which isn't helpful in this competitive market.

I wouldn't be afraid of PMI like everyone talks about... just figure out what PMI would be each month and work it into the numbers. If the deal is ok with PMI then do it, if not then on to the next.

@Drew Whitmore it might be that your purchase prices are too high. The low down payment conventional does not work well anymore due to the tighter guidelines they put in place in 2019. 

In choosing a conventional v FHA loan for a multi family, do both allow you to count 75% of the rents toward your income to help qualify? If not, why does one allow for it and one not?

@Drew Whitmore

@Evan Smeenge

As was mentioned, multi-families have higher down payment requirements for conventional loans. For multi's, the FHA has the advantage because you can still do 3.5% down. But, I think at 3 or 4 family, you have the self-sufficiency requirement that you have to pass -- I forget if that is FHA only or both. Again, you can Google both issues easily enough.

@Braden Downs both, really any, loan products should count only 75% of the rents.

Mortgage insurance for the life of a government backed loan may "suck," but usually its better than the alternative of not getting a loan at all because either your credit isn't sufficient to qualify for a conventional loan (or its PMI is too expensive) or because you lack the down payment. Just consider it part of the cost of money, i.e. its part of your interest rate.

Good luck all.

@Evan Smeenge

No, there is a self-sufficiency test.  I don't remember off hand and you could Google the exact setup (or find it in BP).  For example, something like if a 4 family, the borrower has to be able to cover (e.g. dti) the rent of 3 family units.  Basically, something where "what-if" the multi became vacant...  Nothing to do with reserves (this self-sufficiency aspect).