Second Duplex Lending Struggles

[Kenneth Honer]

Hello Everyone,

About a year ago, I purchased a duplex in Spring City, PA (Chester County) which I currently occupy using 10% down FHA financing. It's going very well so far and I'd like to repeat the process again with an owner occupied conventional loan, again being in any of the SE PA counties.

So far, I've been able to find a lender that will allow me to take out a 15% down conventional for a second owner occupied duplex; however, they have conditions. The first one is the move needs to make sense. (ie closer to work, better school district etc...). I can meet that condition. However, the condition that I can't meet is that the house needs to be at least the same size if not bigger in sq footage and price. My current duplex is in the 95% percentile in SQ footage and has 7 BRs. It will be almost impossible to find one thats that big (that also happens to make sense let alone be a good deal).

So my question to anyone is, am I stuck here or do I have ways around this? Has anyone else been able to move around from MF to MF without having to jump through the aforementioned hoops? Any lender recommendations for the Southeast PA region that would be able to underwrite this type of move? I know it is possible to house hack multiple times--but Im not sure if this specific product Im looking for is typically allowed.

Any guidance helps.

Thanks,

Kenny 

[Julee Felsman]

Thanks for the shout-out @William Sing! :)

@Kenneth Honer The issue you're running into is one that is a common battle house-hackers face... convincing an underwriter that you really intend to occupy the property. This matters because loan terms are more generous (less down, lower rates) for owner-occupied properties, so an unscrupulous borrower has an incentive to lie about where they plan to live to secure more favorable financing. 

Moving from a rental to a home you own (SFR or plex) or moving from a smaller home to a bigger home is accepted as the norm. But downsizing or moving from a SFR to a plex are viewed as possible red flags for occupancy fraud. Fannie Mae calls it "downgrading" your residence (THIS LINK will take you to a Fannie Mae document of common red flags for mortgage fraud.)

A red flag for fraud is not reason to deny your loan... it's just a red flag. The underwriter is on alert and will have questions related to your intended occupancy. It is up to you to answer those questions. In my experience it's best to answer those questions ahead of time. Once an underwriter thinks they've discovered something they think you are trying to sneak past them, they are like a dog with a bone...  you'll have a heck of a time getting them to change their mind. I love our underwriters, but I swear they can be like a bunch of conspiracy theories. 

It's your job -- with the help of your loan officer -- to explain your intentions, lower the red flag and make your plans make sense. Unfortunately just saying "I'm a house-hacker and want to buy more property using an owner-occupied loan" is not an answer that will fly all buy itself. 

This is just one loan officer's opinion, but I don't think it's a bad thing to say that you want to live in a multi-family to help keep your living expenses low or that you believe in keeping real estate that you've purchased, rather then selling it, as part of your long-term financial plan. 

But to have success when you know your plans are going to make an underwriter skeptical, you want to try and find some additional reasons that are more "traditional" in an underwriter's eyes. That's where those "make sense" requests you are getting like moving closer to work or a better school district come from. But if you're living in a 7 bedroom space with a ton of roommates, maybe getting into something smaller where you have more privacy and don't have to argue about who's dirty dishes are on the counter. You just need to sell the move in a letter to the underwriter that they'll buy. 

If all else fails you may be able to add some credibility to your occupancy plans by moving out of your current space and renting an apartment. You are going to need to rent out the space you're in anyway... right?

If you are living in a modest apartment, shopping for a place to buy and move into looks more "normal". Not to say you won't still get questions. I just had to escalate a file and fight for a client moving from an apartment he's renting into an ADU on the property he's buying (main house has tenants in it). He owns five other rentals (many of which he lived in), so the underwriter's kneejerk reaction was to question occupancy... but we got there and that loan is approved now.

Topic near and dear to my heart as I'm both a loan officer and an former house-hacker. I moved from one duplex to another years ago. Even though I was in the industry  (or maybe because I was, now that I think about it... << insert pensive face emoji here >>), I had to fight this battle myself. 

And when it comes to loan options, a few notes on guidelines:

The minimum down payment on a owner-occupied duplex with Fannie and Freddie (conventional conforming loan) is 15%. 

Freddie Mac has a program called Home Possible that allows as little as 5% down on duplex, but it can be a tough box to fit into as your qualifying income can't be higher than 80% of the median income for your area.

FHA will allow a second concurrent FHA loan, but only under special exceptions: if your family size has changed and you need more space or if you are relocating over 100 miles form your current residence due to work.

There are a variety of portfolio programs out there that offer other options. 10%, 5% or even 3.5% conventional loan options exist.

Hope that helps!