FHA & 203K vs conventional loan for multifamily house hack

[Isaac Galli]

Question: Is an FHA or 203K loan better than a conventional loan for purchasing your first multifamily property?

Hello!

I just got off the phone with a mortgage loan officer. 

Backstory: My plan is to obtain pre-approval for a loan before speaking to a real-estate agent and looking for properties. Then, my plan is to close on a multi-family property (duplex, triplex, or fourplex) by June, and house hack it (I live in one unit and tenants live in the other units).

I was under the impression that an FHA or 203K loan would be better than a conventional loan because the government offered lower interest rates? I know that FHA and 203K loan requires PMI (private mortgage insurance), but I thought that you could skirt around the insurance by paying 20% down upfront - is this true?

Moreover, I thought that a 203K loan would be best, since it provides money for rehab.

What are your thoughts? Thank you in advance!

[Ana Coello]

Hi Isaac,

A 203k loan is a type of FHA loan. The great benefit of it is the low down payment of 3.5% but it does have the mortgage insurance premium that you have to add to your loan. Also, insurance rates tend to be higher for FHA loans than conventional loans.

You are also stuck with the private mortgage insurance forever on an FHA loan. The 20% down works on conventional loans only.

There are conventional rehab loans as well. We just got one. We pay 5% down and can get the pmi taken off after paying 20% down. The interest rate is higher than an FHA loan. It is also higher than a regular conventional loan. Since it is a REHAB loan you will pay the price. Good thing is that you can refinance out of it after 6 payments (check with your lender) into a loan with lower interest.

When we compared the 203k with a conventional rehab loan for the same amount of loan. We were able to have more money for the rehab with the conventional one and still stay at the same monthly payments. I would suggest working with a lender who does both and asking him/her to run both scenarios so you can see the breakdown of everything.