The end of the FHA & Househack combo for newbies?

[Robin Dassy]

Okay, maybe this was a bit of a dramatic title, but hear me out.

Until yesterday, my plan had been simple:

Step one: get my first ever property (a house hacked duplex) with an FHA loan.

Step two: move into property and stay in there for at least a year. This would allow me to take advantage of not only the low down payment and affordable interest rate of FHA, but also of the rental income to increase my savings rate.

Step three: buy a second property, maybe after a cash out refinance, and snowball from there.

Everything was ready to go. FHA was my best option, first-time buyers newbies with little cash on hand can't be picky... right? I've read it on forums, heard it on the podcasts, FHA is probably the best way to buy a duplex and get started.

I was ready to go, got pre approved by a lender, then one of the small downsides of FHA started to bother me: mortgage insurance. Unless I make a 20% down payment, I have to pay mortgage insurance for the entire life of the loan. Problem is, i don't have the cash to do 20% and i really don't like the idea of paying it for 30 years if I decide not to refinance. I know the amount goes down as you pay off the balance, but it just bothered me. My only other option to not pay mortgage insurance forever seemed to be a conventional loan with a much higher down payment and only pay until I reached 20% equity.

I was determined to find something better. So I did what we millennials do best and googled my way to an answer.

I found out Home Possible loans are available for duplexes for first time home buyers. JACKPOT I thought. I brought this to the attention of my lender who said he would look into it and work out the numbers. I explained to him that I wanted to take advantage of low down payment loans with decent rates, and he said that Home Possible would be even better than FHA in my case. He just had never seen someone use it for a duplex.

Then he dropped a bomb on me. And it blew my mind. It went something like this: If you're looking to optimize over three years without refinancing, and you're going to occupy the houses you buy, then this opens up a great path. You can start with Freddie's Home Possible loan. After a year you'd be able to get the Fannie equivalent of this, the Home Ready loan. Then after another year, you could do FHA if you really need to.

My jaw dropped. These loans have lower down payments, and even though they have higher interest rates, insurance is cheaper AND goes away at 20%. WHAT?

This is when I ask for your help, BP veterans, lenders or anyone who know about this.

This sounds too good to be true, right? Maybe I just stumbled upon something that is old news to everyone, but this changes everything for me. Would FHA's insurance really offset the higher interest of Home Possible and Home Ready? Would this be the best combo for a newbie wanting to start with a duplex house hack? I understand I am focusing solely on mortgage insurance here, but am I missing anything?