Conventional vs. FHA for Househacking

[Brad Roche]

House Hacking is a great way to become a homeowner and landlord at once! Not to mention- it is a lot cheaper way to buy an investment property rather than putting 20% Down. Which loan do you use…. Conventional or FHA? Read below how the two government loans compare:

Minimum Down Payment Requirements and Credit Scores:

- Conventional: 620 Min.

•         - First-Time Homebuyer: 3%
•         - Repeat Homebuyer: 5%
•         -Multi-Units (2-4 Units): 5%

• - FHA: 500 Min.
•     -First-Time / Repeat Buyers / Multi-Units (2-4 Units)
  • • -3.5% Down = 580+ Credit Score
    • -10% Down = 500-579 Credit Score
    • -0% Down = 600+ Credit Score (1 and 2 units only)

Debt-to-Income Ratio Maximum:

• -Conventional: 45%
• -FHA: 57%

** These are the maximum's set by FHFA- each lender could have additional requirements or have a lower DTI maximum.

Using Projected Rental Income to Qualify:

• Conventional:
  • - Single-Family Residence: You are allowed to rent out individual rooms to help pay the monthly mortgage but at this time- you can not use that towards qualifying
  • 2-4 Units: You are able to use 75% of the projected rental income towards qualifying. (The 25% accounts for vacancies)
• FHA
  • - Single-Family Residence: Same as Conventional; you can rent out the additional rooms but can not use that towards qualifying for the mortgage
  • - 2-4 Units: Same as Conventional; you can use 75% of the projected rental income towards qualifying.

Monthly Mortgage Insurance:

• Conventional (PMI): The Private Mortgage Insurance is required on the loan for anything below 20% Down. Once- you have reached 20% equity in the house- the Monthly Private Mortgage Insurance will automatically fall off.
  • The rate of the PMI is based on your credit score and down payment.
• FHA(MIP): The Mortgage Insurance Premium is on the loan for the life of the loan so it will not be removed. You would have to refinance to a conventional loan to have the Mortgage insurance be dropped.
  • The rate of the MIP is set at .55%

Upfront Premiums/Fees:

• Conventional: None
• FHA: Has the Up Front Mortgage Insurance Premium (UFMIP) and is 1.75% of the base loan amount. It is generally rolled onto the back of the Loan

In all- Conventional and FHA are both great for househacking but it depends on your personal situation which one would be best for you. Talk with your lender on how the two loan options compare for your specific situation.

***Disclaimer**** These are the guidelines set by the FHFA. Each lender may have additional overlays and regulations on top of these. Talk to your lender to find out with overlays.