FHA Loan vs. 5% Down Conventional for House Hacking

Real Estate Agent · Atlanta, GA · Member since 2011 · 16 posts · 3 votes

Hi everyone!

I am seeing that FHA has been commonly associated with house hacking. Is this simply for the lowest down payment possible? Would you still have to live in the property for a year with a 5% down conventional loan?

I am looking to sell my condo and put the bulk of the money into cash flowing rentals out of state and start house hacking in Atlanta. I will take all the advise anyone has to offer! :)

Thank you in advance!

Megan

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Realtor · Atlanta, GA · Member since 2020 · 42 posts · 19 votes

@Megan Broom Hi Megan, I am currently in the process of purchasing a house hack in Norcross, GA. I was thinking of using FHA due to its low down payment requirement. However, after talking with my lender, I decided to go with conventional because of my excellent credit score that would allow me to save money on the PMI. I could have put down only 5% but I decided to put down 10% to save even more. With a conventional loan the amount of PMI charged is tiered and therefore the more you put down the less the PMI. Also with conventional loan the PMI goes away after you have 20% equity. With FHA it stays on the entire life of the loan, unless you refinance. Yes, you do have to live in and occupy the property for both FHA or conventional loans. FHA has a little bit stricter guidelines in terms of the property you can purchase. It needs to be move in ready and livable immediately. whereas if you were looking at properties that need a little bit of work/renovations then conventional would be your best option. I think ultimately it comes down to how much you have for a down payment. If you have the 5% to put down, I think conventional will be the best bet in the long run.

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Erica Larence-Penna
Attorney · RI · Member since 2019 · 157 posts · 93 votes
6y
@Megan Broom from what I understand, you would still need to live in the property with a 5% down conventional loan. I think FHA loans are a little easier to qualify for, so people with lower credit scores are able to qualify. That may have changed during COVID though.
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David M.
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
6y
@Megan Broom
Conventionally are also owner-occupied unless it’s for an investment property (where the loans are about 1% point higher).
The fha and house hacking and first time buyers tend to go hand in hand because of “socioeconomic” factors. New buyers tend not to have cash for a down payment and poor credit score just because they don’t have a long credit history.
It’s possible to qualify for both, but the rate will depend no your credit score. One generally deciding factor is the mortgage insurance. If you have excellent credit, the conventional loan will be cheaper because you can get cheaper insurance on the private market. With a loan credit score, you are a higher risk which where the govt steps in and the fha loan has cheaper mortgage insurnace.
One significant advantage in my mind for the conventional is the pmi can come off and there is no funding fee. Really any govt backed loan the mortgage insurance stays on for the life of the loan. So, in reality the 0.75%-1% or so mortgage insurance just raised your effective rate, sort of.
Does that help clear it up?
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Account Closed
Realtor · Atlanta, GA · Member since 2020 · 42 posts · 19 votes
6y
@Megan Broom Hi Megan, I am currently in the process of purchasing a house hack in Norcross, GA. I was thinking of using FHA due to its low down payment requirement. However, after talking with my lender, I decided to go with conventional because of my excellent credit score that would allow me to save money on the PMI. I could have put down only 5% but I decided to put down 10% to save even more. With a conventional loan the amount of PMI charged is tiered and therefore the more you put down the less the PMI. Also with conventional loan the PMI goes away after you have 20% equity. With FHA it stays on the entire life of the loan, unless you refinance. Yes, you do have to live in and occupy the property for both FHA or conventional loans. FHA has a little bit stricter guidelines in terms of the property you can purchase. It needs to be move in ready and livable immediately. whereas if you were looking at properties that need a little bit of work/renovations then conventional would be your best option. I think ultimately it comes down to how much you have for a down payment. If you have the 5% to put down, I think conventional will be the best bet in the long run.
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Jimmy LieuBusiness Member
Real Estate Agent · Columbus, OH · Member since 2019 · 3k+ posts · 2k+ votes
6y

Wow, this post has so much value. Did you look into Home Ready or Home Possible financing at all? I am house hacking as well.
Also, if you go with a 5% down conventional loan, you have to 100% owner occupy the property for a year? What if you state it's an investment property?

[email protected]614-300-7535
Jimmy Lieu, Red 1 Realty4.9120 Reviews
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Jimmy LieuBusiness Member
Real Estate Agent · Columbus, OH · Member since 2019 · 3k+ posts · 2k+ votes
6y
Originally posted by @David M.:
@Megan Broom
Conventionally are also owner-occupied unless it’s for an investment property (where the loans are about 1% point higher).
The fha and house hacking and first time buyers tend to go hand in hand because of “socioeconomic” factors. New buyers tend not to have cash for a down payment and poor credit score just because they don’t have a long credit history.
It’s possible to qualify for both, but the rate will depend no your credit score. One generally deciding factor is the mortgage insurance. If you have excellent credit, the conventional loan will be cheaper because you can get cheaper insurance on the private market. With a loan credit score, you are a higher risk which where the govt steps in and the fha loan has cheaper mortgage insurnace.
One significant advantage in my mind for the conventional is the pmi can come off and there is no funding fee. Really any govt backed loan the mortgage insurance stays on for the life of the loan. So, in reality the 0.75%-1% or so mortgage insurance just raised your effective rate, sort of.
Does that help clear it up?

Hi David,

Do you think Home Possible or Home Ready is a better option for financing a house hack?
And with the 5% down conventional financing, what if you stated it is an investment property (and you don't want to owner occupy)? Would that be possible or do you have to 100% owner occupy for a year?
[email protected]614-300-7535
Jimmy Lieu, Red 1 Realty4.9120 Reviews
Website View Page
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David M.
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
6y
@Jimmy Lieu
I don't know much about those loans. Never used them, and never really researched them.
You can do conventional financing regardless if you are owner-occupied. If its your primary residence, then you'll get the "market" rate that you hear about. If you are not occupying it and its an "investment" property, the interest rate will be about 1% to 1.5% units higher. Of the conforming loans, the conventional is probably the most versatile.
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Stephanie P.Pro Member
Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
6y
@Megan Broom
- House hacking is the smartest way to get started building your empire, and your questions about financing are smart ones. If you want to sell your condo and live in the Atlanta area, I would:
  - Look for units so you can live in one unit and rent the other.
  - Look for a single family if you don't mind roommates
  - Check local ordinances to check on landlord tenant laws to make sure if you do have a roommate that stops paying, you can get rid of them.
- 5% down on conventional is the best way to go if you're going to buy a single unit because mortgage insurance is going to be significantly less, improving your cash flow. Standard conventional financing though, requires 15% down for 2 units and 25% down for 3-4 units. I've attached the Fannie Mae eligibility matrix for your review. That doesn't take into consideration Home Ready, but Home Ready has income limits, so be aware that the borrower's income can't exceed 100% of the area median income (AMI), with some exceptions based on the property's location and credit scores go down as low as 620.
- I think when all else fails, FHA is a fantastic option, but the upfront MIP and then monthly MI that never goes away needs to be taken into consideration.
  https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B2-Eligibility/Chapter-B2-1-Mortgage-Eligibility/Section-B2-1-3-Loan-Purpose/1736853471/B2-1-3-03-Cash-Out-Refinance-Transactions-07-03-2019.htm
  
  Best of luck
- Stephanie
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Brenden MitchumBusiness Member
Rental Property Investor · Atlanta, GA · Member since 2019 · 1k+ posts · 872 votes
6y
Hey @Megan Broom

@Stephanie P. hit the nail on the head, which is not surprising considering her expert knowledge. This is exactly what my lenders have told me here in the Atlanta area. Conventional is the way to go for a SF and FHA is for small MF.

Keep in mind, you can get that conventional loan down to 3% if all parties on the loan occupy the home. As @Account Closed mentioned you will be paying for this with higher PMI and overall monthly payments.

@Erica Larence-Penna My understanding is that FHA credit requirements have changed (tightened) due to COVID. It's been a month or two since I checked with my lender so things definitely could have changed but with so much uncertainty still in the air I would not count on that.

@Jimmy Lieu You would not be able to get that 5% down conventional loan if you stated it was a nonowner-occupied, investment property. Going off the FNMA eligibility matrix, you'd need to put at least 15% down for a SF investment property.

[email protected]404-737-0018
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Erica Larence-Penna
Attorney · RI · Member since 2019 · 157 posts · 93 votes
6y
@Brenden Mitchum you are correct. I believe they've become stricter on the minimum credit score and some lenders have stopped offering FHA loans altogether.
1 Reply
Jingru Sui
Real Estate Agent · Atlanta, GA · Member since 2014 · 683 posts · 317 votes
6y
I saw a lot has mentioned the comparison of Mortgage insurance. I just want to added, A lot of seller also prefer conventional loan than FHA due to a lot of reasons. Keep that in mind too. You might get a lot more deny before your offer get accepted in a competitive market like Atlanta
1 Reply
Omar Valenzuela
Wholesaler · El Paso · Member since 2020 · 2 posts · 0 votes
5y
sorry for bumping an old thread but I had it understood that you don't have to live on the property for a year if it is conventional loan? Can someone clarify that for me. I might be misinformed.
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