House Hacking Pre-Approval

Rental Property Investor · Seattle · Member since 2019 · 50 posts · 21 votes

Hello,

I'm very new to real estate investing and was looking to do my first house hack. I wanted to first get pre-approved and noticed that when I go to multiple lenders websites, they ask if my objective is for investing or primary residence. When I choose primary residence, the amount of loan money I can get is a lot higher than if I had chosen investing and I was wondering since I technically will be living in the house for at least a year, do I get pre-approved for primary residence or investing?

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Michael HaasBusiness Member

Real Estate Agent · Redmond, 🌧️ Seattle Investor-Agent | 🤑 Helped 400+ Clients Invest in Real Estate | 🏘️ Owns 23 WA Rentals & Airbnbs | 🏗️ Built 5 DADU's | 📈 You Can Do It Too · Member since 2016 · 724 posts · 3k+ votes

@Chace Fraser is right - while investment loans almost always require 20% down (and sometimes 25% or more down!) there are lots of great Owner-Occupant loans for 3.5%, 5%, or 10% down. Owner occupant loans also typically have 0.2% - 0.5% lower interest rates than investment loans.

If you live there for one year the property will have an owner occupant loan for the life of the loan (30 years in most cases!). So yes - if you live in your investment property for the first year you get a lower interest rate, and a lower down payment, for the remaining 29 years or whatever the loan term is.

[email protected]408-439-7873

HouseHack Seattle | Michael Haas & Team572 Reviews

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Carmella Schwab
Bergen County, NJ · Member since 2019 · 4 posts · 2 votes
6y
Hi Ryan,
Primary residence is what I was advised for my house hack. Even if it's only for a year, it is your primary residence. As long as it's a 2-4 unit house. Also, I didn't end up finding my lender online but word of mouth after a few meetups and talking with others investing in real estate. Online is a good place to start but maybe keep asking around! Best of luck!
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Chace Fraser
Realtor · Portland, OR · Member since 2017 · 357 posts · 259 votes
6y
Hi @Ryan Lehman and welcome to BP! House hacking is a great way to get into real estate investing. The reason it's so powerful is that you will be buying a property to live in (primary residence) that will also be an investment. Because you will be living in it, the bank will see it as a primary residence and that's the type of loan you will apply for. Because of this, you will be able to get a mortgage with low down payment options (FHA 3.5 percent) and better interest rates.
When it comes to finding the right lender there are a few things you’ll want to keep in mind. Lenders, like realtors, are not all created equal. In order of importance, here’s what I think is important to look for in a lender. You want to make sure your lender:
- Has worked with house hackers before; the rules change depending on what loan type you use and how many units you purchase. There are A LOT OF TRAPS along the way that can/will make the deal fall through (and cause you to lose your earnest money). You want to be sure the lender you choose has navigated them before.
- Can help you strategize the lending piece for this purchase AND purchases in the future
- Is an investor themselves
If you’d like a recommendation for a lender DM me. I have one that I have closed many house hacking sales with (my own house hack included), and checks off all of the boxes above as well. Not to mention she’s licensed in all 50 states.
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Ryan Lehman
OP
Rental Property Investor · Seattle · Member since 2019 · 50 posts · 21 votes
6y
That all makes sense, thank you Carmella and Chace!
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Michael HaasBusiness Member
Real Estate Agent · Redmond, 🌧️ Seattle Investor-Agent | 🤑 Helped 400+ Clients Invest in Real Estate | 🏘️ Owns 23 WA Rentals & Airbnbs | 🏗️ Built 5 DADU's | 📈 You Can Do It Too · Member since 2016 · 724 posts · 3k+ votes
6y
@Chace Fraser is right - while investment loans almost always require 20% down (and sometimes 25% or more down!) there are lots of great Owner-Occupant loans for 3.5%, 5%, or 10% down. Owner occupant loans also typically have 0.2% - 0.5% lower interest rates than investment loans.
If you live there for one year the property will have an owner occupant loan for the life of the loan (30 years in most cases!). So yes - if you live in your investment property for the first year you get a lower interest rate, and a lower down payment, for the remaining 29 years or whatever the loan term is.
[email protected]408-439-7873
HouseHack Seattle | Michael Haas & Team572 Reviews
Website View Page
5 Reply
Michele Z.
New to Real Estate · Augusta, GA · Member since 2019 · 96 posts · 34 votes
6y
@Chace Fraser - what kind of TRAPS? Or can you point me toward something to read to expand my knowledge?
0 Reply
Alex Kim
Lender · Irvine, CA · Member since 2018 · 71 posts · 15 votes
6y
@Ryan Lehman Congrats on taking the first step! Typically there are two options when house hacking:
1) Purchase a 2-4 unit property. Live in one unit, rent out the rest. They cost more than SFR/condo, but you can use your projected rental income to qualify for the loan - higher leverage.
2) Purchase a 1 unit SFR/condo. Live in one room, rent out the rest. You cannot use projected rental income to qualify for the loan.
Don't forget property tax, insurance, maintenance, vacancy when you run the numbers, and do what makes sense in terms of monthly cash flow (+/-) as well as possible appreciation potential in your market.
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Ryan Lehman
OP
Rental Property Investor · Seattle · Member since 2019 · 50 posts · 21 votes
6y
@Alex Kim
Thank you! I'm definitely looking more towards purchasing a 1 unit SFR and renting out the rooms since I think I might have a better chance of getting something like that in the price range of around 600,000 somewhat near downtown Seattle

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Chace Fraser
Realtor · Portland, OR · Member since 2017 · 357 posts · 259 votes
6y
Originally posted by @Michele Z.:
@Chace Fraser - what kind of TRAPS? Or can you point me toward something to read to expand my knowledge?

Great question. People often throw around purchasing a 3-4 unit property with an FHA loan. What they forget to mention (or simply do not know), is that there is something called the self sufficiency test. This is so the bank can mitigate their risk. Here's the equation:

Gross rents for all units LESS a 25 percent vacancy factor MUST be greater than or equal to the mortgage payment.

or

(Gross Rents * 0.75) ≥ PITI

When calculating the gross rents, the bank takes the LOWER of the current/appraised rents. If a unit is vacant, the bank will use the appraised rental value for that unit. Passing the self sufficiency test is not always easy and can kill a deal.

They will also require that you have 3 months of reserves available (PITI x 3). There is no reserve requirement nor self sufficiency test for duplexes.

Keep in mind there are limits to how much a person can borrow when using an FHA product. You'll want to make sure you're within those limits. You can find the loan limits by googling "CITY FHA loan limits 20XX".
The best way to get these questions answered would be to talk to a lender who has worked with house hackers before. I can link you up with mine if you like (she's licensed in all 50 states). If so send me a DM.

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Michele Z.
New to Real Estate · Augusta, GA · Member since 2019 · 96 posts · 34 votes
6y
@Chace Fraser Are there usually similar issues with conventional lenders? I will drop you a DM.
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