House Hack: FHA or Low-Down Conventional

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Hey guys, quick question for you. I have been planning to house hack a small multi-family for quite some time now, and have a question about strategic financing.

My question is: If I only plan to live in the property one year before moving into another small multi using another low-down payment loan, are there any advantages to going with the FHA or Conventional that would be important to consider? My plan is to buy a new property and house hack it for a year, for the next 5 years (obtaining 5 properties). What I don't want to do is end up in a situation where I can't finance the next ones because I made a silly mistake from the get-go.

Thanks in advance!

The low down payment conventional you can use for an owner occupied purchase is called “HomePossible“. It’s generally 5% down and covers 2-4 unit properties if you live in one unit. To qualify, you must be a first time homebuyer and earn less than around $60k/year (that’s number varies by location). 

This loan is better than FHA because the mortgage insurance is lower, and can be dropped when you reach 80% equity. With FHA loans, the mortgage insurance is higher and will remain for the life of the loan.

If you are married, best route for your plan would be to use a HomePossible, then FHA, then have your spouse do a HomePossible, then FHA. Of course, that all depends on whether you qualify but that's the ideal route. If you're married, don't put your spouse on title or the loan so that they can also use a first time buyer loan in the future!

Good luck!

James, thanks for your response. HomePossible is the loan product I had in mind, however I have heard that if you want to use an FHA loan then you cannot already have a loan on a property within 100 miles of the second property that you would be using the FHA loan on. If that is true (I've seen a number of blog posts referring to that, but I haven't verified it) then wouldn't it make sense to go FHA, HomePossible, FHA, HomePossible?

I am married, so I will definitely keep that strategy in mind!

Do HomePossible (2-4 units). After a year, buy another with the FHA (2-4 units). Then after a year you can do HomeReady (1 unit). I wish I had. If you start with FHA, you can do the HomeReady. If you wanted to get another 2-4 unit, you will need to refinance out of the FHA into a conventional and then get another FHA.

Homepossible can only be used for first time homebuyers, so you wouldn't be able to use FHA first and the Homepossible.

I'm not an expert on the 100 mile rule; I would call a lender and ask about that. Don't quote me on this, but I believe they can make exceptions if there's a reason for the move like size of home, work location, etc.

I plan on purchasing my first home as a house hack as well. I'd like to get a duplex with low money down. I've seen a few banks offer a first time home mortgage or what I'm assuming are the Homeready loans. Unfortunately this loan will not work with a multifamily home.

I am worried about all the PMI and fees associated with the FHA. Seems like it is difficult to have any positive cash flow this way but I suppose once you refinance into a conventional loan this would improve.

@Michael May it really is a great strategy and way to get into real estate without needing a lot of money saved up. Check with a lender in your area, but the home possible loan with 5% down does work on a 1-4 unit property. There is another similar loan called the home possible advantage that allows you to only put down 3%, and that one is limited to just one unit. As for the loans and low down payment, you are right it does make it harder to cash flow, but if you find a great deal it is definitely possible. 

@James Clements Thank you for sending me that link! Wow that is so awesome, the home possible seems like such a better loan than the fha, being that it is conventional, pmi drops off and no need to refinance, pmi is lower, and there is no up-front pmi. What that means is more cash flow. It will be so much easier to pull off this strategy when they loosen up the rules.

@Steven Young As you mentioned, one of the worst parts about FHA is that the PMI sticks around for the life of the loan. Assuming you couldn’t do the first time Home buyer loan, you could still get a conventional on a 1-4 unit by doing 15% down. If there enough forced appreciation through rehabbing, then you could refinance it toward the end of be house hack and pull out your down payment/rehab expenses.

@James Clements Do you know if it is possible to do a cash-out refinance using the home possible 5% down? I am looking to buy a property with a lot of equity in it.

@Steven Young are you asking if you can refinance if you purchased with 5% down product? Yes, you should assuming the equity is there and you wait the required seasoning time. Or can you purchase then later refinance into 95% ltv cash out? That I doubt will be possible. My quick check told me 80% ltv was max available. So your deal/value add would need to be significant in order to get your seed funds back out and leave the required 20% in. If it's a great deal, you could get extra back. Also one thing to mention, I'm not 100% on this but if you refinance using a owner occupy product you will be required to live in the property another year. Refinance as investment, terms are less favorable, usually 75% ltv max and higher rate but you would not have to OOcc. @chris mason is the expert on here