FHA vs 5% Conventional for House Hacking; Which is truly better??

Question

Hello and thank you for reading!

To keep things simple, I'm interested in starting house hacking duplexes. Here’s my plan:
Buy a duplex that is cash flowing on paper. Live in one side and rent the other side, plus have a roommate paying rent.(I already could have a friend that wants to do this with me) Aggressively pay down the mortgage to reach 20% equity as quickly as possible (hopefully within a year or two). Move out and repeat the process.

My dilemma is whether to go with FHA (3.5% down) or 5% conventional. I used to believe FHA was the best option for house hackers, but I recently learned that if you put less than 10% down on an FHA, the MIP stays for the entire 30-year mortgage unless you refinance. This means paying an extra $170–$200/month forever or paying closing costs every time I want to scale.On the other hand, with 5% conventional, I pay PMI for a few years, but once I reach 20% equity, I can simply request it to be removed without needing to refinance.

I’d love to hear all thoughts on this because personally haven't actually done it. Has anyone successfully scaled their investment using the 5% conventional route? Are there any hidden pitfalls or considerations I’m missing with the conventional strategy?

Matthew Porcaro · Answer

Hey @Carson Cicenas - so generally speaking, Conventional is for more qualified borrowers, and FHA is for "everyone" I've personally used both products on my house hacking journey, but more with the FHA 203k and Fannie Mae Homestyle renovation products. That helped me build equity quickly so I usually refinanced out of each.

Pros of FHA: -Generally lower interest rate than conventional-Ability to get up to 6% sellers concession (this could help closing costs, or rate buy downs)- 600 credit score

Cons of FHA:-Can only have one under your name at a time-MIP for the life of the loan-Upfront MIP (about 1.75% of the loan) Pros of Conventional:-PMI based on credit score and deal-You can remove PMI at 20% equity with appraisal (as you mentioned)-Slightly easier on inspectionsCons on Conventional:-Credit score very important (over 720 preferred, 760+ ideal)-On multifamily you need more in reserves than FHA-Loan Level Price adjustments can sometimes not make sense (better credit score is worse pricing, I still dont completely understand it)-Can only get a 3% sellers concession (half of FHA)

A good lender should be able to price out both scenarios for you (assuming you qualify for both) and you can then compare. I'd say if you want to limit your out of pocket at closing, FHA is generally the way to go. If you're worried about overall cost over the loan duration and you have good finances, Conventional is probably the way to go.

Rick Albert · Answer

It's a preference and no right answer.

I could argue that you are paying 5% either way because with FHA there is a 1.5% fee attached to the loan amount.

@Matthew Porcaro is right that renovation loans are an amazing way to get started. My second house hack was with the FHA 203(k) loan. Later on we refinanced twice and got our payments significiantly lowered.

If the property doesn't need work and you can qualify/swing for the 5% down, in many cases I would go that route. You also avoid the self sufficiency test if you buy a 3 or 4 unit property.

Thinking long term, you may be able to negotiate the Seller to buy down your rate permanently. This means putting 5% down, locked in a lower rate, and later on remove the PMI and you are in good shape.

Aaron Zimmerman · Answer

Depends what your goals are but for a property that doesn't require significant value add, I'd favor the 5% down loan.

Christopher Tile · Answer

Agreed with @Aaron Zimmerman here. With value add/repairs, definitely look at a 203(k) loan.

Matthew Porcaro · Answer

I'm biased, but I can confidently say it's the best thing I ever did and I've been involved on several hundred transactions using the program :) It puts house hacking on steroids. Yes, you need a 203k consultant when doing the 203k route. They are home inspectors that help you create your scope of work of what needs to be completed per safety/code, and whatever YOU want to do to the property (update kitchens/baths, add square footage, etc.) Its a pretty clear cut process as long as you have a deeply experienced lender, consultant, and solid licensed and insured contractor (not your Grandma's handyman). You get an accepted offer, have the consultant go out to do the inspection and create the work writeup, then you send that work writetup to the contractors to bid on. Once you find a contractor and agree on price, you submit that to the lender and the lender adds that to the purchase price. They appraise the property based on "ARV appraisal". So the appraiser uses the work writeup to see whats going to be done to the property, and appraises the property such that the work has been completed. Happy to help you anytime if you decide to go that route!

Minho Lee · Answer

That’s a great question. I just want to add that while deciding which loan structure works best for you is important, I’d focus first on finding a good deal in a good location.

Once you have a property identified, you can then present it to your lender and see which loan structure best aligns with your long-term real estate goals.

Wale Lawal · Answer

@Carson Cicenas

This is a good strategy, but I would emphasize buying the better deal versus trying to buy the loan product you want. If you are eligible for a 5% conventional rate, being able to get out of PMI without having to refinance is an added benefit, but compare it to the other choice based on which one offers the most financial flexibility. The key to scale is buying well, not how you financed your purchase.

Good luck!

Carson Cicenas · Answer

@Matthew Porcaro  With good credit, it looks like conventional might be the way to go for getting rid of PMI quickly for me. The 6% seller concession on FHA is pretty tempting, but for me havinging to pay it back it would cost me more.

When you were using the 203k, did you need a consultant and a full team, and how involved was the process?

FHA vs 5% Conventional for House Hacking; Which is truly better??

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