FHA vs conventional loan
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Andrew PostellPro Member
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes@Amy Lee I need to provide some clarification on your post if you don't mind.
1. Downpayment - there is no 5% downpayment using a conventional loan with a 2-4 unit property. A few years back there was, but there hasn't been that option for a while now. So your options using a conventional loan are 15% down with a duplex as your own primary home and 20% down with a 2-4 unit property.
2. FHA Rules - now FHA has this rule called the "self-sufficiency" rule on 3-4 units properties. This rule basically states that the rents have to be OVER the mortgage payment. And since rates are so high right now, and properties are so expensive, satisfying the "self-sufficiency" rule is next to impossible. And that means no FHA loans on 3-4 unit properties right now. This is an economic environment problem that will not always be around but be aware of this. Keep in mind that this does not apply on duplexes.
I know that was a lot but feel free to ask anything additional. Thanks!
13 Replies
- Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes3yThe way I remember it is that FHA has much stricter inspection requirements and allows for a lower credit score and a higher debt to income ratio with some exceptions for employment history as well.
Quote from @Amy Lee:
What would be the perks of using an FHA loan to househack on a multi family home (duplex-triplex)? There's the lower down payment but that makes your mortgage higher, you have to pay the the PMI (I forgot the term on FHA loans) for less than 20% down payment that lasts the life of the loan in my understanding, paperwork can be a lot I hear, and takes longer to close. So the only benefit is the lower down payment which you can do on a conventional loan also. Can someone educate me? Thank you!!
- 3yDerek BrickleyBusiness MemberLender · Ann Arbor, MI · Member since 2021 · 664 posts · 226 votesIt will depend on your specific situation for sure, but they are very comparable loan products. The conventional product has income limits, and FHA will be a much better option in general for those with lower credit scores. With the conventional you would need 5% downpayment whereas FHA you can go 3.5%. The benefit of going conventional if you qualify for a first time homebuyer product is that you can use that twice and then FHA after for three househacks without having to refinance. For most people though, the FHA househack will make the most sense.
Quote from @Amy Lee:
What would be the perks of using an FHA loan to househack on a multi family home (duplex-triplex)? There's the lower down payment but that makes your mortgage higher, you have to pay the the PMI (I forgot the term on FHA loans) for less than 20% down payment that lasts the life of the loan in my understanding, paperwork can be a lot I hear, and takes longer to close. So the only benefit is the lower down payment which you can do on a conventional loan also. Can someone educate me? Thank you!!
Gold Star Mortgage Financial Group548 Reviews - 3yAndrew PostellPro MemberLender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
@Amy Lee I need to provide some clarification on your post if you don't mind.
1. Downpayment - there is no 5% downpayment using a conventional loan with a 2-4 unit property. A few years back there was, but there hasn't been that option for a while now. So your options using a conventional loan are 15% down with a duplex as your own primary home and 20% down with a 2-4 unit property.
2. FHA Rules - now FHA has this rule called the "self-sufficiency" rule on 3-4 units properties. This rule basically states that the rents have to be OVER the mortgage payment. And since rates are so high right now, and properties are so expensive, satisfying the "self-sufficiency" rule is next to impossible. And that means no FHA loans on 3-4 unit properties right now. This is an economic environment problem that will not always be around but be aware of this. Keep in mind that this does not apply on duplexes.
I know that was a lot but feel free to ask anything additional. Thanks!
- 3yAmy LeeMember since 2022 · 21 posts · 10 votesOP
Quote from @Andrew Postell:
@Amy Lee I need to provide some clarification on your post if you don't mind.
1. Downpayment - there is no 5% downpayment using a conventional loan with a 2-4 unit property. A few years back there was, but there hasn't been that option for a while now. So your options using a conventional loan are 15% down with a duplex as your own primary home and 20% down with a 2-4 unit property.
2. FHA Rules - now FHA has this rule called the "self-sufficiency" rule on 3-4 units properties. This rule basically states that the rents have to be OVER the mortgage payment. And since rates are so high right now, and properties are so expensive, satisfying the "self-sufficiency" rule is next to impossible. And that means no FHA loans on 3-4 unit properties right now. This is an economic environment problem that will not always be around but be aware of this. Keep in mind that this does not apply on duplexes.
I know that was a lot but feel free to ask anything additional. Thanks!
I don't mind at all. Thank you for correcting and sharing information!!
- Orange County, CA · Member since 2019 · 10 posts · 4 votes3y
Quote from @Andrew Postell:
@Amy Lee I need to provide some clarification on your post if you don't mind.
1. Downpayment - there is no 5% downpayment using a conventional loan with a 2-4 unit property. A few years back there was, but there hasn't been that option for a while now. So your options using a conventional loan are 15% down with a duplex as your own primary home and 20% down with a 2-4 unit property.
2. FHA Rules - now FHA has this rule called the "self-sufficiency" rule on 3-4 units properties. This rule basically states that the rents have to be OVER the mortgage payment. And since rates are so high right now, and properties are so expensive, satisfying the "self-sufficiency" rule is next to impossible. And that means no FHA loans on 3-4 unit properties right now. This is an economic environment problem that will not always be around but be aware of this. Keep in mind that this does not apply on duplexes.
I know that was a lot but feel free to ask anything additional. Thanks!
if I have some cash saved up and looking to leverage that money to the most and my W2, would you recommend getting a conventional loan first and then in a year move to another place with FHA? or should I do the opposite and start with the FHA?
- 3yDerek BrickleyBusiness MemberLender · Ann Arbor, MI · Member since 2021 · 664 posts · 226 votesSelf sufficiency is true but if you qualify under the income limits then you can use a conventional HomePossible with 5% down on a duplex.
Quote from @Andrew Postell:
@Amy Lee I need to provide some clarification on your post if you don't mind.
1. Downpayment - there is no 5% downpayment using a conventional loan with a 2-4 unit property. A few years back there was, but there hasn't been that option for a while now. So your options using a conventional loan are 15% down with a duplex as your own primary home and 20% down with a 2-4 unit property.
2. FHA Rules - now FHA has this rule called the "self-sufficiency" rule on 3-4 units properties. This rule basically states that the rents have to be OVER the mortgage payment. And since rates are so high right now, and properties are so expensive, satisfying the "self-sufficiency" rule is next to impossible. And that means no FHA loans on 3-4 unit properties right now. This is an economic environment problem that will not always be around but be aware of this. Keep in mind that this does not apply on duplexes.
I know that was a lot but feel free to ask anything additional. Thanks!
Gold Star Mortgage Financial Group548 Reviews - 3yAndrew PostellPro MemberLender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
@Derek Brickley ah, good point. This was a product option that was available but nobody could use it because the income limits were so low. I should start thinking about it more now. The income limits were changed in May and it really did help more people qualify. Prior to that change, the income limit was $52,000 (or so) in my market...now it's $82,000 for most areas by me.
@Amy Lee us this tool here: https://sf.freddiemac.com/work... to see if your income is BELOW the 80% median threshold. If so, you can do 5% down on a 2-4 unit with Freddie Mac.
- 3yAndrew PostellPro MemberLender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
@Mena Soliman USUALLY it's a little easier to get the FHA loan first. FHA will have specific requirements when leaving your existing primary home...so if you get that FHA loan first, then you aren't restricted by FHA rules on the 2nd home. Only way to know for sure is to get prequalified though. So let's do that when the time comes for you to buy. Thanks!
- Investor · Member since 2022 · 111 posts · 150 votes3y
Quote from @Andrew Postell:
@Amy Lee I need to provide some clarification on your post if you don't mind.
1. Downpayment - there is no 5% downpayment using a conventional loan with a 2-4 unit property. A few years back there was, but there hasn't been that option for a while now. So your options using a conventional loan are 15% down with a duplex as your own primary home and 20% down with a 2-4 unit property.
2. FHA Rules - now FHA has this rule called the "self-sufficiency" rule on 3-4 units properties. This rule basically states that the rents have to be OVER the mortgage payment. And since rates are so high right now, and properties are so expensive, satisfying the "self-sufficiency" rule is next to impossible. And that means no FHA loans on 3-4 unit properties right now. This is an economic environment problem that will not always be around but be aware of this. Keep in mind that this does not apply on duplexes.
I know that was a lot but feel free to ask anything additional. Thanks!
And just to add, the self sufficiency test actually says 75% of the rent has to cover 100% of the mortgage. Which makes it even tougher. @Amy Lee I think it really depends on your goal with the househack. I just started my first house hack in February with a duplex, I did an FHA loan at 3.5%. It doesn't cover my entire mortgage, I pay about 40% of the total expenses... for now. Here is a break down and why it worked for me.
Property was 645k - 4br, 2ba in each unit, my total cash to close was 33k. 5.65% FHA loan with a total expenses including utilities, lawncare, trash, wifi, etc is $4950 to $5100 a month. I found FHA to be really easy on the lending side, closed in 30 days. Right now I rent out half the home at 3K a month. This worked for me vs the conventional loan because I had to furnish my half of the home so i wanted more cash in the bank. I accepted the PMI with the knowledge that I will refinance to a conventional loan at some point. My current goal would be 5-7 years, but it obviously depends on rates. Whenever it does happen I know that I am gonna get the $440 a month of PMI back and with the increased equity and (hopefully) decreased rates, a lower mortgage payment. Again its all about your plan.. I am moving out of mine after a year, even if it means renting, because if I rent the other half for 3k I am now looking at a property that cashflows approximately $1000 a month. Once the refinance happens it could jump to $1500-$2000. So i say again, whats your goal? Prices are high so I had to adjust because I couldn't make something cashflow from day 1. But I am playing the long game with this so I am fine with the short term minimal gains for the future long term benefits. I wish you the best of luck with everything! - 3yRyan ThomsonBusiness MemberReal Estate Agent · Colorado Springs, CO · Member since 2018 · 1k+ posts · 1k+ votes
I would keep in mind that if you get a duplex, triplex, or quad you are going to have to put 15% down with a Conventional loan.
With FHA you can get a duplex for 3.5-5% down. Do know that FHA has a self sufficiency test on triplex and fourplexes. In order to pass the self-sufficiency test, you'll need to prove that 75% of the rental income you're likely to receive will exceed the full monthly mortgage payment. If not, you will have to put 15-20% down for triplexes and fourplexes with FHA. FYI there is no self sufficiency test for a duplex.
The Assumable Guy544 Reviews - 3yDerek BrickleyBusiness MemberLender · Ann Arbor, MI · Member since 2021 · 664 posts · 226 votes
Quote from @Ryan Thomson:
I would keep in mind that if you get a duplex, triplex, or quad you are going to have to put 15% down with a Conventional loan.
With FHA you can get a duplex for 3.5-5% down. Do know that FHA has a self sufficiency test on triplex and fourplexes. In order to pass the self-sufficiency test, you'll need to prove that 75% of the rental income you're likely to receive will exceed the full monthly mortgage payment. If not, you will have to put 15-20% down for triplexes and fourplexes with FHA. FYI there is no self sufficiency test for a duplex.
Hi Ryan!
Like I mentioned above many people overlook the FreddieMac HomePossible product where you CAN go 5% down. Income limits apply but may be a great option for some people.
Gold Star Mortgage Financial Group548 Reviews - Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes3y
@Amy Lee in most markets, the home possible has been the "home impossible" for a while now.... at least here in Chicago it goes FHA at 3.5% down and then conventional at 25% down for 3-4 units.
- Lender · Cleveland, OH · Member since 2011 · 587 posts · 435 votes3y
@John Warren lol... good one!
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