Stuck for my next property

[John Smith]

I am having a hard time figuring out how I would be able to finance my next property. I am in Massachusetts. Basically, I have a single family home now that I live in and a 3 family rental property. I want to rent out my current single family home and move into a 3rd property (3-4 family where I live in one unit and rent out the others). I am wondering what the lowest down payment option would be for my scenario. I wouldn't qualify for the FHA because all 3 properties will be within 100 miles and I would need that future rental income from my departing residence to count for DTI to offset the mortgage. I also wouldn't qualify for a 5% conventional (which would be the most ideal) because the 3rd property would be a multi family property. I feel like I am stuck here unless there are some type of creative financing options I'm not aware of. Otherwise, I feel like there's no way around the 20%. I appreciate any insight to loan options you have!

[Scott Trench]

Following - confused why you aren't able to use a 5% down conventional for a house-hack in your situation. Have you talked with several lenders on this point? I'd start there. 

I could be completely off on this, but I'd bet you CAN use a low down payment conventional loan to do a house-hack on a small multifamily in this situation. 

[John Smith]

Yes I've talked to a few but still am waiting to hear back from some. Everywhere I look it says 15% for 2 units, 25% for 3-4 units for owner occupied multi family. That would be perfect but unfortunately looks like it would have to be a SFH.

[Alban Celiku]

Quote from @Scott Trench:

Following - confused why you aren't able to use a 5% down conventional for a house-hack in your situation. Have you talked with several lenders on this point? I'd start there. 

I could be completely off on this, but I'd bet you CAN use a low down payment conventional loan to do a house-hack on a small multifamily in this situation. 

 I agree with @Scott Trench, I have been quoted 5-20% owner occupied for residential MF as long as it meets the self sufficiency criteria in MA. If you’re going to owner occupy the property, then you should qualify for as low as 5% down payment. The traditional 20-25% down payment requirements refer to investment properties to my knowledge, unless things have changed in the past 30 days. I’d be happy to connect you to my lenders if you’d like!

[Ash Hegde]

@Scott Trench only FHA keeps the low down payment option when buying multifamily. 15% for a duplex and 25% for 3-4 units is accurate for conventional.

This is tough without the FHA option, at some point you're going to need higher capital amounts to buy rentals. Any interest in renting out rooms in the new home and using a 5% conventional?

[John Smith]

Quote from @Alban Celiku:

Quote from @Scott Trench:

Following - confused why you aren't able to use a 5% down conventional for a house-hack in your situation. Have you talked with several lenders on this point? I'd start there. 

I could be completely off on this, but I'd bet you CAN use a low down payment conventional loan to do a house-hack on a small multifamily in this situation. 

 I agree with @Scott Trench, I have been quoted 5-20% owner occupied for residential MF as long as it meets the self sufficiency criteria in MA. If you’re going to owner occupy the property, then you should qualify for as low as 5% down payment. The traditional 20-25% down payment requirements refer to investment properties to my knowledge, unless things have changed in the past 30 days. I’d be happy to connect you to my lenders if you’d like!

Alban, if you are aware of any lenders that would do a 5% down payment for an owner occupied MF in MA, please send me their names!

[John Smith]

Quote from @Ash Hegde:

@Scott Trench only FHA keeps the low down payment option when buying multifamily. 15% for a duplex and 25% for 3-4 units is accurate for conventional.

This is tough without the FHA option, at some point you're going to need higher capital amounts to buy rentals. Any interest in renting out rooms in the new home and using a 5% conventional?

Ash, I'm not totally following the question. Are you talking about my current SFH or the new MF home? In the new MF home, all the units other than mine will be rented out (2-3). My SFH will be rented out as well. I don't think anyone would give me a 5% conventional on an owner occupied MF.

[Ash Hegde]

My question was for the new one - if you would be interested in buying a SFH instead of a multi, living in a room and renting out the others. That would allow you to use 5% down, though you couldn't count the rental income for DTI purposes, and of course you'd have roommates - which may not be ideal for your personal situation. On the plus side, it gets you another property with a low down payment and rental income.

[John Smith]

Quote from @Ash Hegde:

My question was for the new one - if you would be interested in buying a SFH instead of a multi, living in a room and renting out the others. That would allow you to use 5% down, though you couldn't count the rental income for DTI purposes, and of course you'd have roommates - which may not be ideal for your personal situation. On the plus side, it gets you another property with a low down payment and rental income.

Ah I understand now. That's an option, not ideal obviously, but I will do some research on what kind of rent I'd get and consider my personal situation as well. Thank you.

[Brittany Minocchi]

@John Smith there is a program that will allow 5% on a 2-4 unit multifamily if you are occupying and meet the additional requirements. It may not be offered by the lenders you've spoken to. 

[Osvaldo Pena]

@John Smith surprised no-one has mentioned this, but have you considered doing a DSCR refi on the multi family to take some cash out which you can use on the multifamily you're looking to acquire?

[John Smith]

Quote from @Brittany Minocchi:

@John Smith there is a program that will allow 5% on a 2-4 unit multifamily if you are occupying and meet the additional requirements. It may not be offered by the lenders you've spoken to. 

I've talked to quite a few and no luck. Would you know of any by chance? That would be the best case for me.

[John Smith]

Quote from @Osvaldo Pena:

@John Smith surprised no-one has mentioned this, but have you considered doing a DSCR refi on the multi family to take some cash out which you can use on the multifamily you're looking to acquire?

I don't know too much about these but have seen these around and they seem to be very popular. Assuming I have to maintain 25% equity, I could only take out 50k, which would help but I'd still have a ways to go for a down payment in my area.

[John Smith]

Thinking a bit more about this, what if i moved out of my current residence (rented it out) and rented an apartment for myself 6-12 months? I would file taxes with my residence being the new apartment. Then, would I be able to count both properties for the FHA?

Current                                            Plan                                6-12 months

Prop 1 -my residence                  Prop 1 - rent                         Prop 1 - rent
Prop 2 - rent                              Prop 2 - rent                         Prop 2 - rent
Apartment - my residence Prop 3 - FHA MF rent and live

[Shiloh Lundahl]

@John Smith are you having a hard time finding under market values properties? A 5% down purchase doesn't create much wealth very quickly. Why don't you working on doing a BRRRR and then moving into it? Then keep it 3-7 years and then trade up using a 1031 exchange? That is the quicker way to build wealth through real estate. Quicker than a 5% down payment loan. What are your thoughts?

[Will Stewart]

@John Smith make sure to try local credit unions too. Metro and Webster First both have some unique programs. 

[Ryan Mapes]

@John Smith another option might be to use revenue based financing to cover your down payment. In this scenario, you'd trade a portion of your future rental income in exchange for cash upfront. It doesn't add debt (so you're covered from a DSCR standpoint) and you don't give up equity.

This is usually a great option when you're looking to scale and you need cash for renovations or for a down payment on your next investment property.

Happy to chat if you have questions about how it works.

[Andrew Freed]

@John Smith - They have 5% conventional owner occupied loans on multis at small local credit unions and banks. I've done it myself in Worcester and am doing it again Fidelity Cooperative Bank did it for my last house hack. I also know a ton of other banks in the area that offer a similar type product. Feel free to shoot me a DM. 

[Albert Bui]

Quote from @Scott Trench:

Following - confused why you aren't able to use a 5% down conventional for a house-hack in your situation. Have you talked with several lenders on this point? I'd start there. 

I could be completely off on this, but I'd bet you CAN use a low down payment conventional loan to do a house-hack on a small multifamily in this situation. 

Its because on conventional standard (non home possible freddie mac) its 5% down for 1 unit property, 15% down for 2 unit, and 20% down for 3-4 units owner occupied freddie mac (25% down on fannie mae). Freddie takes the 5% LTV or less down payment advantage over fannie however freddie has some "other," downsides as well when compared to Fannie mae's 3-4 unit guidelines.

There are other programs like freddie mac home possible that can do 5% down up to 4 units but you're income restricted to 80% of the AMI (area median income) so you're in parts of town where it might be less favorable to owner occupy a 3-4 unit house hack as the OP @John Smith wants to buy in.

@John Smith to get around the FHA 100 mile rule you may have to move out of your current SFR first, lease it out fully, and time season it for 6+ months. Assuming he doesnt have or isnt going for a 2nd FHA mortgage, he can now use rental income on the SFR to offset that monthly payment (PITIA). As with prior, if he vacated the SFR during the new purchase FHA will not let him use rental income offset because you would have elicited the FHA 100 mile rule. This is just a work around, around the rule.

@Matthew Kwan

@Carlos Valencia

[Albert Bui]

Quote from @John Smith:

Thinking a bit more about this, what if i moved out of my current residence (rented it out) and rented an apartment for myself 6-12 months? I would file taxes with my residence being the new apartment. Then, would I be able to count both properties for the FHA?

Current                                            Plan                                6-12 months

Prop 1 -my residence                  Prop 1 - rent                         Prop 1 - rent
Prop 2 - rent                              Prop 2 - rent                         Prop 2 - rent
Apartment - my residence Prop 3 - FHA MF rent and live

 exactly this is what I meant in my other post, the min I've seen (real loan files closed as a lender) is you'll need 6+ months in that new apartment, your parents house, or another location living there. 

I was able to get 3/10 underwriters to accept less than 6 full months a couple of times but the probability of success under 6 months at the new address was so low that we do not use that in our mortgage planning any more. I now recommend clients use 6+ months as a min time seasoning period of living in the new apartment or address before the FHA app to purchase.

For context, this is to use rental income offset from the prior property that you're leaving (the SFR in your original post) otherwise you'd be hit with the 100 mile rule from FHA.

@Matthew Kwan@Carlos Valencia

[Hector Serna]

Hey what’s up man! Quick question, did you start off by buying a single family home and living in it? I’m currently wanting to do what you’re doing but I don’t know what to do… my current residence wouldn’t rent out for the mortgage price. I’m stuck too 😂

[Albert Bui]

Quote from @Hector Serna:

Hey what’s up man! Quick question, did you start off by buying a single family home and living in it? I’m currently wanting to do what you’re doing but I don’t know what to do… my current residence wouldn’t rent out for the mortgage price. I’m stuck too 😂

Hey Hector yes I started out house hacking the places I lived in.

Recently Fannie Mae announced that on Nov 18th 2023 they will allow up 95% LTV or 5% down payment on all unit types 1-4 units so thats a huge change. Prior you had to put 15-25% down to buy the higher unit properties that were 2-4 unit. This change makes it easier for people who but 2-4 unit properties to “house hack.” 

This doesnt solve the problem of finding a great deal that will make the numbers work but it does lessen the boundaries around house hacking multi-unit properties. 

You still have to find a deal where all 3-4 units will pay for the mortgage eventually after you move out of the property.

[Albert Bui]

Quote from @John Smith:

Yes I've talked to a few but still am waiting to hear back from some. Everywhere I look it says 15% for 2 units, 25% for 3-4 units for owner occupied multi family. That would be perfect but unfortunately looks like it would have to be a SFH.

Starting 11/18/23 the LTV for all 2-4 unit conventional loans when owner occupying are going from 75-80% up to 95%. This just fancy speak for the fact that min down payment will basically be 5% across the board when it comes to buying or refinance with as little as 5 % down payment/equity.

I think this will push up prices for 2-4 unit properties even more and alot of us who are in this 2-4 unit space will inevitably have to start looking in the 5+ unit space.