House Hacking and Qualifying for FHA

[Nessa Lyn]

Hello! I'm a newbie and have yet to buy my first official property. (I inherited my dad's home but the loan is not in my name) 

I found a 5 bdrm home that would be PERFECT as an AIRBNB! I was looking at an FHA loan over conventional as the home is $850k and I don't have $200k as a dp.

My plan would be to live in one room and rent out the other 4 bdrms for one year, and then move out and use it as an STR.

So, my question is, If I was to go the route of FHA, could the Lender take into consideration that I would be renting out the other rooms to help with the monthly debt? Is there another way or loan that you all think would work better?

Thanks!

[Miller McSwain]

Are you worried that you won't qualify for this $850k home solely based on your household income? So you are wanting to use the potential income of the property to help you qualify?

I've had a situation similar to this. I purchased a house that I am renting-by-the-room. My lender wouldn't consider potential income when qualifying me for this house.

HOWEVER, he will consider the income of this property when I purchase my next property. So when he is calculating my Debt-to-Income ratio while I'm being qualified for the next house, he will see that all or some of my mortgage payment on the first house is covered by tenants.
I'm not sure if he will assume the market long-term rent income, or if he will actually look at the leases I have in place though.

But basically, I don't think your lender will consider un-proven income to help purchase this house. Once you've proven income though, the lender may consider it during the purchase of your next property.

[Reid Chauvin]

@Nessa Lyn - if this were a multi-unit property (duplex, triplex) then the rental income (as determined by an appraiser) could be factored into your monthly income regardless of whether or not you have a history of receiving this type of income. However, if this is a 1-unit property then you are likely not going to be able to use income from the other bedrooms to help you qualify, unless this is something that you've been doing for the past few years. This is referred to as 'boarder income' and you generally need 2 years tax returns showing proof that you've been receiving boarder income, and you also need to prove that you are currently receiving boarder income. 

[Nessa Lyn]

Quote from @Miller McSwain:

Are you worried that you won't qualify for this $850k home solely based on your household income? So you are wanting to use the potential income of the property to help you qualify?

I've had a situation similar to this. I purchased a house that I am renting-by-the-room. My lender wouldn't consider potential income when qualifying me for this house.

HOWEVER, he will consider the income of this property when I purchase my next property. So when he is calculating my Debt-to-Income ratio while I'm being qualified for the next house, he will see that all or some of my mortgage payment on the first house is covered by tenants.
I'm not sure if he will assume the market long-term rent income, or if he will actually look at the leases I have in place though.

But basically, I don't think your lender will consider un-proven income to help purchase this house. Once you've proven income though, the lender may consider it during the purchase of your next property.

 Yea, I was thinking that too, and a good point about using it as income for the next property. Correct, we will not qualify for a loan that high. Unless they would accept a larger down payment? 

[Nessa Lyn]

Quote from @Reid Chauvin:

@Nessa Lyn - if this were a multi-unit property (duplex, triplex) then the rental income (as determined by an appraiser) could be factored into your monthly income regardless of whether or not you have a history of receiving this type of income. However, if this is a 1-unit property then you are likely not going to be able to use income from the other bedrooms to help you qualify, unless this is something that you've been doing for the past few years. This is referred to as 'boarder income' and you generally need 2 years tax returns showing proof that you've been receiving boarder income, and you also need to prove that you are currently receiving boarder income. 

 yea I was afraid of that. Thanks, that answers my question.

[Dominick Johnson]

Well first of all an FHA loan only requires 3.5% down payment if you're living in the house, so your down payment on $850k would only be $29,750.

[Suzie Remilien]

@Nessa LynYes, agreed that down payment would be about $30,000 whether you go Conventional (3%) or FHA (3.5%) on that primary residence. However, don't forget closing costs which could run between 3%-5% of the price. Could you rent out rooms in the home you inherited to help save for that first purchase?

[Khari F.]

If you were a lender would you factor in non existent rental income from someone with no experience managing rentals based on assumption? What are the rental comps? How much are you prequalified for and what is expect PITI? Show the lender why this is low risk.

[Nessa Lyn]

Quote from @Suzie Remilien:

@Nessa LynYes, agreed that down payment would be about $30,000 whether you go Conventional (3%) or FHA (3.5%) on that primary residence. However, don't forget closing costs which could run between 3%-5% of the price. Could you rent out rooms in the home you inherited to help save for that first purchase?

oh, I thought a Conventional loan would be 20% down! I'm in the process of getting a HELOC on the home, so I could definitely do 5-10% down.

[Nessa Lyn]

Quote from @Dominick Johnson:

Well first of all an FHA loan only requires 3.5% down payment if you're living in the house, so your down payment on $850k would only be $29,750.

 Yes, I could do the downpayment. It's the qualifying for the monthly mortgage payment that I know I wouldn't qualify for.

[Dominick Johnson]

Quote from @Nessa Lyn:

Quote from @Dominick Johnson:

Well first of all an FHA loan only requires 3.5% down payment if you're living in the house, so your down payment on $850k would only be $29,750.

 Yes, I could do the downpayment. It's the qualifying for the monthly mortgage payment that I know I wouldn't qualify for.

Gotcha. I misunderstood your post and thought you were saying that you needed advice on how to make the deal work because you needed $200k as the downpayment. As far as qualifying for the loan, your best bet is to talk to your lender and see what they need from you to get you approved. 

Have you ran the numbers on this? My humble advice is don't do it. $850k is a huge risk for your first investment. I would strongly suggest starting out smaller. SFH that are under $250k are the quickest real estate to sell, so always consider your exit strategy in the beginning before making a purchase.

[Suzie Remilien]

Quote from @Nessa Lyn:oh, I thought a Conventional loan would be 20% down! I'm in the process of getting a HELOC on the home, so I could definitely do 5-10% down.

Quote from @Suzie Remilien: You can put as little as 3% down on Conventional if it's a primary residence. With investment properties 20+% down payment is required on Conventional. Have your lender compare the costs of going FHA vs Conventional to see which loan option is best. 

@Nessa Lyn