Second 2 family at 5% down?

Question

Hello Everyone!! I’ve been along time supporter of the Community here without actually making an account since I was so devoted to the YouTube and podcast side. Im finally on the forums, yay!

I recently just purchased a 2 family unit about a month ago using FHA and my question is, how difficult is it to obtain a second 2 family a year from now with only 5% down? My current situation is I'm Married and purchased my current 2 family under my name, my wife's credit isn't the best but we are working on getting it up so we can both be on the next home loan. We plan to buy another 2 family next year and make that our new primary, will that be enough to justify a 5% down payment conventional? With all the new house hacking popularity and people interested, it seems like no one fully goes in depth on this approach, it's always kinda vague.

What do I do with my current 2 family fha loan when I’m approaching buying the second 2 family? Do I refinance that into a conventional as well?

Sorry if this has been covered before and I’m sure it has but I can’t find anything concise enough.

Grant Schroeder · Answer

@Chace Fraser Thanks for the in depth analysis! I love how you lay out all of the options. I am a lender who helps house hacking clients as well as a 2x house hacker myself. We have multiple clients who have purchased a 2-4 unit in just 1 spouses name using an FHA loan as you mentioned, and then the other spouse purchases another 2-4 unit with their own FHA loan 1-2 years later. It's a great strategy, the only downside is you have to refinance out of PMI like you said. For @Mark Alston, if his wife's credit and income is not enough to have her own FHA loan for their second house hack, like @Brad Hammond mentioned, he would need to rate/term refinance the current FHA loan into a conventional loan to then go and use his FHA loan again on his 2nd house hack.

One important thing to note, a conventional "Homeready" loan was Fannie Mae's solution for 1-4 unit properties and lower income borrowers. This has required 15% down for quite some time on a duplex. The Conventional "Home Possible" loan solution that Chace used for his first house hack was Freddie Mac's conventional loan solution for 1-4 unit properties and lower income borrowers. This used to be a 5% down loan solution for duplexes for a long time becuase Freddie Mac has a higher threshold for risk than Fannie Mae does. Within the past several months, Freddie Mac has raised the "Home Possible" required downpayment for owner-occupied duplexes to 15% just like Fannie Mae's HomeReady and the traditional Conventional loan solution without any income caps. The HomeReady & HomePossible loan solutions have an income cap still, and lower mortgage isnurance options when compared to the traditional 15% down Conventional solution, but now they both also require 15% down as well. 15% down for a duplex is still much better on interest rates and cash out of pocket when compared with needing 25% down as an investment loan. If someone is still looking for a lower downpayment option than the 15% conventional solution, the best remaining low downpayment option for 2-4 unit properties is the FHA loan currently.

@Mark Alston @Chace Fraser @Brad Hammond  If you or your clients ever have questions about house hacking or strategizing for the next purchase, I would be happy to hop on a phone call or Zoom meeting to walk through the details. Please do not hesitate to shoot me a Message here on BP if you have more questions on the details or you'd like to talk further.

Chace Fraser · Answer

Hey @Mark Alston , the financing part of house hacking is the most important... if you don't get it right you can paint yourself in a corner and it will take a long time to scale. And it sounds like you're talking about the conventional home possible loan, correct? That was the loan product my wife and I used to purchase our duplex... and we had a strategy very similar to yours.

As you probably know, for the most part, you can only have one FHA mortgage in your name at one time. There are exceptions that are few and far between (like if you were moved to another area by your work), but for the most part it’s only possible to have one at a time. If two people are on the same FHA loan, then this counts as their one FHA loan.

One strategy is to leapfrog who is on the loan/purchasing the property and on title (only having one person, not both, on the mortgage and title of a single property).  How this would work is one person would buy the first property with their FHA loan, and then when you’re ready to purchase the second property, the other person could purchase it with their FHA loan. Yes, this does present the challenge of both individuals needing to be able to qualify for a loan on their own, but it’s a great way to do it. Then, when it’s time to purchase the third property, you could refi out of the first FHA loan (if you have enough equity), and then use your FHA loan again, or use a conventional loan product.

This strategy is not without its challenges. One person must be able to qualify for a loan on their own. It works well in Oregon because we’re a personal property, not community property, state. This means that when one of us goes to get an individual loan, the bank will not look at the other person's debts/liabilities.

My wife and I are leapfrogging but doing it slightly different than explained above. Our first purchase was a duplex and we used a 5 percent down conventional loan (again, only one person on the mortgage/title). The next property will be that same conventional product (if we still qualify for the home possible) purchased by the other, and then the following properties will be purchased with an FHA loan. Using the conventional product first does a couple of things for us:

• We won't have to refi out of the FHA loan to eliminate PMI
• Once we reach 20 percent equity PMI will go away
• We still have our FHA loans available to use

If you’re single, or just don’t have another person to leapfrog with, or one person alone doesn’t qualify, you could purchase the first property with the 5 percent down “home possible” conventional loan, and then purchase the second property with your FHA loan. Game Planning for multiple house hacks can get a little tricky.

The best person to speak with would be a lender who is either an investor themselves and/or has worked with house hackers before. They're going to know all of the rules, gray areas, and will help you be able to game plan correctly.

BP is a great place to find lenders like this... or at least people who know lenders like this.

Best of luck and feel free to reach out with questions!

Brad Hammond · Answer

Hey @Mark Alston, welcome to the forums. If you purchase a duplex with an FHA loan, the down payment is 3.5%, however, if you purchase a duplex with an owner-occupied conventional loan, the down payment is 15%. With your situation, you will want to stay in your home for at least a year to satisfy the loan (2 years if you are planning on selling it within 5 to avoid paying capital gains tax). After a year, you will need to refinance into a conventional owner-occupied loan. Once that is done you can purchase your next home with an FHA loan and get that 3.5% downpayment.

I hope that helps. Best of luck with your next purchase!

I hope that helps.  Best of luck with your next purchase!

Mark Alston · Answer

Thank you so much for the very in depth reply, much appreciated! I’m married and have my current home fha solely under my name in NJ. My question is, would it be possible for my wife to get an fha loan of her own without me since I’ve already used mine? I’m not sure how NJ works a scenario like this out

Second 2 family at 5% down?

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