FHA loan on house hacking duplex when own SFH w/conventional loan

6 Replies

We own our current home with a 15-year conventional loan. We have about 80k in equity (about 40% equity). We would like to move about 20 miles away (my wife was offered a job on the other side of town). We would like to house hack a duplex or fourplex. Can we buy using an FHA loan? Will 3.5% down be possible? A mortgage broker we are using is telling me a duplex must be 5% down for FHA and must be more than 100 miles from our current home. Is that right? Any and all advice appreciated. Thanks all!

Yes, you can. I've alternated between VA and FHA loans to buy and owner-occupy 5 different properties close to each other, one after the other. I've never had a problem, but each time, my mortgage broker has had me write a letter explaining why I wanted to move to the next property - your wife's new job is a great reason. FHA loan limits vary by the number of units - for a duplex, I think the limit is $471k. When I last bought, the minimum down payment was 3.5%, but they offered a lower interest rate if I put 5% down. I'd suggest talking to multiple lenders.

@Daniel J Jackson

You can do 3.5% down up to 4 units for FHA. The mortgage broker telling you 5% down is mistaken or their company has an overlay on the actual FHA guidelines.

In order to use rental income to offset the existing payment on your current residence (this is called a conversion of primary residence), FHA guidelines require that you are moving 100 miles away. That's just to use the rental income. If you qualify without needing that rental income, then you're good to go. If you need it, then you can't go FHA if you're only moving 20 miles away and keeping that home as a rental/investment property.

Conventional financing does not require this distance guideline on a conversion of primary, but for a 2-unit you'll need 15% down and for a 3-4 unit you'll need 25% down.

Hope that helps clarify.

Perhaps you could refi your current home and pull cash out for a down payment and go Conventional?  Just a thought...

@Zack Karp

Thank you Zack!  You hit the nail exactly on the head.  The main issue is that, given that we are only moving 20 miles away, we cannot use the rental income from our current home (which we will keep and rent out) in order to offset the mortgage payment on it.

There seem to be two options to move forward:

a) Qualify even with this liability (I may qualify to carry both mortgages)--this option is not ideal because, if I am understanding correctly, this will make it harder for me to qualify for future loans.  We are planning on going 50/50 on a home with a family member later this year, and I worry I would be maxed out by this point and have a hard time qualifying.

b) Come up with 15% and go conventional.  Either:

i) Do a cash out refinance, like you suggest.  Can you explain a little better how this works?  Is there a max?  The home is worth about $195K and we owe $105K.  It's on a 15 year term.  It would rent for $1500. Do we refinance to a new 15 year?  Move to a 30 year? I guess I would want the payment to equal about 75% of rent so that it does not count against me?

ii) Take a HE Loan on current home. $40K HE Loan would come in about $900/mo payments. I could afford this given my lower payments on a duplex (about $1900 PITI with an $1100 rent, that leaves me with $800 to pay for my side, so I can absorb the additional $900, for a total "payment" of $1700).

Again, I appreciate your insight. Best-Daniel

@Daniel J Jackson

Regarding your options, for "a" this won't impact future loans.  Just because you cannot use the rental income on your departing residence for your new purchase, doesn't mean you can't use that rental income in the future.  So if you can qualify with both payments now, you are good to go.

For "b", for the cash out refi, you will want to do this simultaneously with your new purchase mortgage.  As an investment property, you can get 75% of the appraisal.  So if your home is worth $195K, you could get a new loan for up to $146,250.  So you will have around $40K that you can get as cash out (more or less depending on how you structure it, high or low closing costs, etc) for down payment on the new property.  15yr vs 30yr term just depends on your preference and cash flow.

Just make sure you are working with a rockstar lender/LO that understands investors, won't screw up a simultaneous transaction, and is looking out for your best interests and helping you see a few moves ahead so you don't make a misstep or get stuck.

Hope that helps!  Let me know if you have any other questions.

@Barry Hawkey was their a time limit between each property purchased?

Originally posted by @Justin Booker :

@Barry Hawkey was their a time limit between each property purchased?

 Yes, I had to live in each property for at least a year.  I always tried to be ready to buy the next property by then, but it still took me two years in each property before I was ready to buy the next.

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