Using a Gift to Pull Off Househack

5 Replies

Learnt some interesting stuff today. For using an on 3&4 unit MF, you cannot use a gift as cash reserves. I believe you need at least 3 months of cash reserves (at least according to 1 lender). BUT! You can use the gift to make the downpayment - and use your capital saved as the reserved instead of using that as the downpayment. Just a fun little thing I thought was interesting and will definitely come in useful down the line. Do you guys know of some other funky maneuvers in regards to gift and pulling off househacks w/ FHAs?

Good info to share for those who don't know. That is correct, 3 months of reserves for 3 to 4 units with FHA loan. No reserves required for 1 or 2 units with FHA.

Be aware of the self sufficiency test for 3 to 4 units if using an FHA loan

Keep in mind, for retirement accounts (IRA, 401k), lenders will count a certain % of that towards reserves. So people sometimes have more 'reserves' than they think

To help boost income / qualify for a larger loan, you could plan to occupy the "smallest" unit that would bring in the least rent if rented out, and rent out the larger, more profitable units

These are some really good points - I often harp on the important of keeping the SST in mind - especially because it seems to be an important concept that isn't mentioned enough. 

In regard to reserves - this is also true - I've been told to generally use 70% of the 401K amount because of the taxes for dipping into those funds.


Can you expand on the idea you brought up about qualifying for a largest loan by occupying the 'least expensive' unit - from my understanding - it doesn't matter which units are being occupied by whom. But I could be incorrect. Please let me know what you've learned from your experience. 

Originally posted by @Austin Negron :

These are some really good points - I often harp on the important of keeping the SST in mind - especially because it seems to be an important concept that isn't mentioned enough. 

In regard to reserves - this is also true - I've been told to generally use 70% of the 401K amount because of the taxes for dipping into those funds.


Can you expand on the idea you brought up about qualifying for a largest loan by occupying the 'least expensive' unit - from my understanding - it doesn't matter which units are being occupied by whom. But I could be incorrect. Please let me know what you've learned from your experience. 


It does matter, you should talk to a lender to understand the loan a bit better. And Sure, I can tell you from personal experience. If you are going to buy a duplex, and say one unit is a 3 bed 1 bath, and one unit is a 1 bed 1 bath. Which one do you think will rent for more? Let’s assume the 3 bed 1 bath will rent for more

If you tell the lender you plan to occupy the 1 bed 1 bath, a portion of the projected rent from the non owner occupied unit ( the 3 bed 1 bath) gets included in your income when they run your DTI

If you say you're going to occupy the 3 bed 1 bath, then the non owner occupied unit (the 1 bed 1 bath in this case) get included in your income when they run your DTI

More $ will be factored in if you occupy the smaller unit than the larger unit 
 
The fha self sufficiency test is where for 3 to 4 units the rents for All units minus a vacancy provision is calculated to make sure the the property could carry itself. But that’s separate from the lender calculating how large of a loan they’ll give you based on dti

If you reply to this, please tag me so I get a notification. The reason I saw your reply from 6 days ago was someone upvoted my post last night and I clicked the notification this morning, lol 

This is awesome information. I confused the significance or lack there of which unit was rented not effecting the SST but now see how that effects DTI and the related loan size. Thank you for your willingness to explain that. Now that I have a clearer understanding it makes sense that renting out the smaller unit would increase your loan size because you'd presumably be getting more income. I'd also imagine this takes place after the property is put under contract in terms of shopping around different loan sizes. Thank you for the insight. - Austin

Originally posted by @Bradley Padula :
Originally posted by @Austin Negron:

These are some really good points - I often harp on the important of keeping the SST in mind - especially because it seems to be an important concept that isn't mentioned enough. 

In regard to reserves - this is also true - I've been told to generally use 70% of the 401K amount because of the taxes for dipping into those funds.


Can you expand on the idea you brought up about qualifying for a largest loan by occupying the 'least expensive' unit - from my understanding - it doesn't matter which units are being occupied by whom. But I could be incorrect. Please let me know what you've learned from your experience. 

It does matter, you should talk to a lender to understand the loan a bit better. And Sure, I can tell you from personal experience. If you are going to buy a duplex, and say one unit is a 3 bed 1 bath, and one unit is a 1 bed 1 bath. Which one do you think will rent for more? Let’s assume the 3 bed 1 bath will rent for more

If you tell the lender you plan to occupy the 1 bed 1 bath, a portion of the projected rent from the non owner occupied unit ( the 3 bed 1 bath) gets included in your income when they run your DTI

If you say you're going to occupy the 3 bed 1 bath, then the non owner occupied unit (the 1 bed 1 bath in this case) get included in your income when they run your DTI

More $ will be factored in if you occupy the smaller unit than the larger unit 
 
The fha self sufficiency test is where for 3 to 4 units the rents for All units minus a vacancy provision is calculated to make sure the the property could carry itself. But that’s separate from the lender calculating how large of a loan they’ll give you based on dti

If you reply to this, please tag me so I get a notification. The reason I saw your reply from 6 days ago was someone upvoted my post last night and I clicked the notification this morning, lol 

 




Originally posted by @Austin Negron :
This is awesome information. I confused the significance or lack there of which unit was rented not effecting the SST but now see how that effects DTI and the related loan size. Thank you for your willingness to explain that. Now that I have a clearer understanding it makes sense that renting out the smaller unit would increase your loan size because you'd presumably be getting more income. I'd also imagine this takes place after the property is put under contract in terms of shopping around different loan sizes. Thank you for the insight. - Austin

Originally posted by @Bradley Padula:
Originally posted by @Austin Negron:

These are some really good points - I often harp on the important of keeping the SST in mind - especially because it seems to be an important concept that isn't mentioned enough. 

In regard to reserves - this is also true - I've been told to generally use 70% of the 401K amount because of the taxes for dipping into those funds.


Can you expand on the idea you brought up about qualifying for a largest loan by occupying the 'least expensive' unit - from my understanding - it doesn't matter which units are being occupied by whom. But I could be incorrect. Please let me know what you've learned from your experience. 

It does matter, you should talk to a lender to understand the loan a bit better. And Sure, I can tell you from personal experience. If you are going to buy a duplex, and say one unit is a 3 bed 1 bath, and one unit is a 1 bed 1 bath. Which one do you think will rent for more? Let’s assume the 3 bed 1 bath will rent for more

If you tell the lender you plan to occupy the 1 bed 1 bath, a portion of the projected rent from the non owner occupied unit ( the 3 bed 1 bath) gets included in your income when they run your DTI

If you say you're going to occupy the 3 bed 1 bath, then the non owner occupied unit (the 1 bed 1 bath in this case) get included in your income when they run your DTI

More $ will be factored in if you occupy the smaller unit than the larger unit 
 
The fha self sufficiency test is where for 3 to 4 units the rents for All units minus a vacancy provision is calculated to make sure the the property could carry itself. But that’s separate from the lender calculating how large of a loan they’ll give you based on dti

If you reply to this, please tag me so I get a notification. The reason I saw your reply from 6 days ago was someone upvoted my post last night and I clicked the notification this morning, lol 

 

Happy to help! 

And no, you have it flip flopped. Telling your lender you'll be renting out the LARGER units would increase the max amount you can be loaned because you'd have presumable more rental income. Renting out the smaller unit would give you LESS rental income resulting in a SMALLER overall amount you can be loaned

And no and yes on your last sentence. Generally you need to include a lender prequalification letter as part of an offer to have it considered, which can't be accurately provided until you tell the lender the proposed rent for the non occupied unit(s). You'll be hard pressed in this market to put in an offer with no lender pre-approval and have it accepted. Sellers want to know that you have your ducks in a row in terms of financing. You should really talk to a lender to learn more about loans and also a few local realtors to understand what goes into a successful offer.

Before you even start shopping, you should talk to a lender and run a few scenarios with them so you can get a realistic maximum loan size in mind. If you don't, it's like going to a car dealership and choosing the perfect Ferrari, then at checkout they don't approve you for financing because the monthly payments are crazy high and you can't afford it. It is smart to run several scenarios with them. One scenario, duplex where the rented unit is $1500/month income. Based on that they say you can borrow up to xxx. Another scenario, duplex where the rented unit is $2500/month income. Based on that they say you can borrow xxx. And so on. This will help you understand based on your current personal income, debts, and the varying proposed rents on the multi fam,  if you can afford a $200k multi or a million dollar multi. 

When you identify a property you want to put an offer in on, you contact you lender and they input the proposed rent and see if you'll at a high level qualify. From there they give you a prequal letter. This is part of your offer. When you have an accepted offer, Then as part of underwriting, the appraisal also include a rental appraisal to make show average market rents in that area for that sized unit

So in practice, you don't really find a property, then shop around for different loan sizes, quite the opposite, you need to know your budget across different scenarios, and then shop accordingly, keeping your lender in the loop if you want to make an offer to see if the multifam is within your price range