FHA Loan with House Hacking. And how to run the numbers

13 Replies

Good Morning BP Community! 

What are your thoughts on FHA loan? Pros, Cons? What should I look for and what should I avoid?

My wife and I are looking into buying a duplex to house hack. Since my wife gave up her lifestyle in Texas to come to the fridge winters of Pittsburgh, I'd like to provide her with a comfortable apartment. The duplex we are looking at tend to be a bit more expensive since they are 2 bd/1 etc and as such, we'd like to take advantage of the low down payment FHA has to offer. An additional problem I am bumping into is running the numbers. When I use mortgage calculators, the low down payment and *fingers crossed* relatively low interest rate gives a large monthly payment. What do you all advice when running the numbers for an FHA loan?

@Carloz Gill Its true FHA has lower interest rate compare to conventional mortgages. It could be higher MI in your case if your FICO is higher compare to conventional loan. You should have both comparison in front of you to take right decision. If you do not own any property you can compare with Home Possible which has 5% down payment requirement.

@Carloz Gil first of all you wife is a gem to give up that sunny weather. If you want to buy in a very good area the cash flow is not going to be great but it will at least get you in the door. Unless you find a duplex that needs work or is in a C or D area this is what you are going to have to settle for. If you find a property that needs extensive repair then an FHA loan will probably not work due to the appraisal inspection that comes with FHA guidlines.

@Carloz Gil I think FHA is great because you can ask for a 6% seller assist when you go to make your offer. This limits your money out of pocket. FHA is particular about the condition of the house though so it needs to be in pretty decent shape if you go that route. There is an FHA 203k loan option that lets you wrap renovation costs into the mortgage as well. Don't forget to account for the PMI on an FHA loan. It is .85% of the total loan amount per year. This will be an additional payment every month for you. Look for value add opportunities where you could increase the rents right away because the current landlord has kept them low or make minimal cosmetic improvements to increase the cash flow.

@Harjeet Bhatti thank you for the advice! How about the down payment? Typically can go as low as 3.5% correct? 

@Ian Hoover , she is pretty great! Although I am sure she'll prefer the summer here over Texas heat;)

Thanks for info on guidelines. That'll probably help narrow down the search.

@Jeremy Taggart , the 203k sounds like a good option. I imagine renovations costs have to be significantly low if they are going to meet those FHA guidelines Ian Hoover was talking about, correct?

Run the numbers as if you aren't living there. PMI is pretty expensive but you can cash out refi if you have the equity.. A portfolio lender does in my area up to 89.5% OO.

FHA inspections can be tough so make sure everything is up to their standard. I believe you can print their inspection checklist online. With my FHA I did quite a few repairs prior to closing with the sellers written permission. Use a sellers concession if you are trying to limit the amount of money out of pocket. I closed on my FHA for 5.6k out of pocket on a 122.5k purchase price and 7% sellers concession (Loan of 129.5k) and a year later cash out refi'd and pulled out 17k. I got my down payment and rehab money back.

Good luck! 

@Carloz Gil Home possible has 5% minimum down payment requirement and FHA has 3.50% down payment requirement.

@Carloz Gil I am a big fan of FHA, it was created for the sake of providing assistance to those who cannot afford a large 20% down payment.

Pros: Low down, competitive interest rates, lower credit score requirements

Cons: Mortgage Insurance for life the loan, a separate appraisal that needs to meet requirements per FHA, slower process, not as competitive in this market where bidding wars are common

With that said, it is still possible to find a deal that works. Finding a duplex will be difficult to cash flow, three family is a little easier and a four family would be ideal. Keep an eye out for any and all properties hitting the market 2-4 units and make sure to be conservative in your numbers accounting for PITI, Mortgage Insurance, Cap Ex, Maintenance, Vacancy, Utilities, etc.

Best of luck!

@Carloz Gil if you're going strictly FHA, then yes the house has to be in pretty good shape. 203k though the house can be trashed you can finance all the repairs into the mortgage. Numbers just have to make sense as your purchase price + renovations have to be less than the ARV.

You've gotten a lot of information about FHA and the advantages of house hacking so I want to speak of the 2nd part of your thread title "And how to run the numbers"

Personally, I would run the numbers of the property two ways..   with you living in the property and with you NOT living in the property. 

The first way, with you living in the property, will be a good barometer of how much you will have to pay out of pocket (if any.)  The thought here is if you're living in one of the units, you will not be collecting rents on that unit.  Let's just say you purchase a duplex and your mortgage is $2,000 a month..  If you're house hacking and can only rent out the other half for $800 a month, you would have to pay $1,200+ a month to live there (2,000 mortgage expense - 800 rent coming in = 1200 mortgage expense you have to kick in + whatever other property expenses.)  Will that be cheaper then just renting or buying another property in the area?  If not, maybe house hacking isn't a good way to get started with investing because it will cost you more.

The other way you want to run the numbers is once you eventually move out.  By now being able to collect the two sides of rents, is the property actually profitable?  Does the property give positive cash flow?  

These two ways will help you determine whether the property is a "good investment" or not.  Best of luck and let me know if you have any other questions!

if there is another option other than FHA - use it as its likely better than being stuck with the high permanent FHA mortgage insurance for the life of the loan PLUS you would avoid having to pay the UFMIP ( upfront mtg ins premium ) of 1.75%

@Dave Skow thanks for the heads up. It it possible to refinance FHA and not be stuck with that mortgage insurance?

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