How to house hack a MF home using an FHA

Question

Hi! I've been reading a lot on BPP for the last 6 months now and am finally getting to looking at properties! I'm currently looking at some MF in the Hudson Valley and want to finance it with FHA, as it would be my primary residence...so I want to house hack as Brandon calls it.

I looked at a home that needed some rehab and the seller's agent said the seller wasn't too keen on FHA loans because she had already dealt with another buyer who also wanted to finance with FHA. The seller's agent said if I go FHA, the home has to be inspected by a specific inspector sent by FHA, and in that case, the first buyer was denied the home because it didn't pass the specific "FHA inspector" guidelines for a "203K rehab loan".

The home was built in 1940 and needed some rehab but without a contractor, I wouldn't know how much.

Does anyone have experience on how to buy older MF homes that need some renovation using an FHA loan?

Can you apply for a 203K rehab loan and still get the house approved by FHA?

Steven Gesis · Answer

Hi Lauren-

These can be tricky, check-out: (3) Secrets Everyone Needs to know about using a 203k loan for more information on the 203k loan, loan process and how to build the right team for success.

Good luck to you!

Lauren Norman · Answer

Thanks Logan Allec Did the house need any rehab? Did you do anything with a 203k?

Upen Patel · Answer

@Lauren Norman What the realtor stated does not make sense. FHA 203(k) is a rehab loan and does not need the house to be in a habitable stated. The HUD inspector is going to inspect the home and identify issues with the house which HAVE TO BE done. These items are not optional and most likely over and above what you had planned.

The issue might be that the house had some major issues that the seller does not want to be found. The would have to drop the price to give your room to get the rehab done.

The other issue could be that the buyer could not get qualified for the loan. Which happens all the time.

Lauren Norman · Answer

Thank you @Steven Gesis & @David Faulkner Appreciate the help!

Steven Gesis · Answer

David - let me help:

FHA Loan - is just a product type it is not any different from a 203b conventional loan, other than having a renovation component you can use to find a fixer upper and not have to be exposed to out of pocket construction cost using only 3.5% down, even with PMI for an owner occupant this is a killer product.

Here is a simple and easy guide that will resolve all these challenging questions:  (3) Secrets Everyone Needs to know about using a 203k loan

Finally, the FHA appraisal & inspection - this is no different from a conventional loan appraisal other than the inspector is looking for various health & safety and large deficiencies that would make the home inhabitable.  If deficiencies exist, the contractor will have to add them to their scope of work in conjunction with any elective items you may select. This is a benefit, you get to have everything in a operable and habitable condition, mitigating all health & safety concerns.

Lastly, if you need a HUD Consultant, this would be in a case of a full / Standard 203k, instructions in resource link above.

All this is super simple, I say this from experience, so I am fairly liberal with this statement. But, in reality it designed to be usable and user friendly at the end of the day. This loan is only for owner occupant (1-4) unit. You cannot have more than (1) of these loans at a time.  Not really for investors, unless you get a multi, occupy (1) unit and rent the others.

Much Luck!

David Faulkner · Answer

Actually, thinking about it further, there may be other means besides FHA financing to get a good deal on distressed property without much capital. They include (but may not be limited to) creative financing, hard money loans, etc ... each of them come with their own risks and difficulties of their own. Thoroughly research to make sure you understand the risks and mechanics of these methods before applying them ... there are those that specialize in such things here on BP, but I'm not one of them ... I'm old school, save up, and use "plain vanilla" financing kind of guy. I hope this helps give you additional options and considerations ... good luck!

David Faulkner · Answer

I don't personally have any experience with buying a multi via FHA, but I can tell you from a seller's point of view ... having not dealt with the FHA inspection aspect before, I was amazed when my realtor advised that I'd need to, for example, repaint the eves of my house because some of the paint was flaking off, and that FHA would likely flag it and not issue a mortgage, because of something as minor as flaking paint ... the eves were freshly paint 5 years ago, mind you, so its not like they had been neglected for 20 years. I chose to follow his advice and repaint because the market is majority FHA buyers and I could fetch a much higher sales price if I could sell to one of them.

So, I guess what I'm saying is from an FHA buyer's point of view, I don't see how they could get a deal on something if it can't even have anything as minor as pealing paint. Maybe there is a way, but I can't think of what it might be. So, no discount plus only 3.5% down means you start out of the gate with negative equity, since it would cost you more than 3.5% if you wanted or needed to sell the place ... that may be an acceptable risk for you to get in the game earlier, but one that you should be aware of and consider.

On the other hand, when I look to buy a buy and hold property, I go look for pealing paint and much worse, because I know I can get a discount much larger than the repair costs, and I validate those numbers. I put 20% down, though, and don't have to compete with any FHA buyers ... my 20% down plus additional equity from getting a good deal means that I have a very strong equity position day 1 in case I need or want to sell (I don't plan to, but sometimes "stuff" happens). Take it one step further, and the big investors buy with all cash, either off market, at the courthouse steps, or REOs that don't qualify for any financing ... they don't have to compete with any retail buyers at all (FHA or conventional financing) and get an even larger discount accordingly.

Logan Allec · Answer

@Lauren Norman, I put about $10k of sorely-needed repairs into it but didn't take out a 203k loan.

Logan Allec · Answer

@Lauren Norman, it's really luck of the draw.  My appraiser was extremely lenient with the FHA piece of the inspection on my four-unit house hack.

Lauren Norman · Answer

@Jason Clark

How to house hack a MF home using an FHA

Most Popular Reply