20-25% Required as Down Payment on House Hack

[Brandon Weis]

I just had a bank tell me that per new Fannie guidelines, the minimum down payment on a 3-4 unit is 20-25%, even if it is bought as a primary residence. Personally, I think they are wrong. I think they are just an extremely conservative bank and that is their interpretation of Fannie's guidelines.

I have already gotten approved from some other banks (credit unions), so I'm not worried, but I am curious if anyone else has run into a bank telling them they need at least a 20% down payment on 3-4 units, regardless of it being FHA or not. I truly just think this was a conservative bank/incompetent loan officer.

[Brandon Croucier]

Thats just incorrect if its owner occupied.

[Matthew Kwan]

Yes they are wrong. Borrowers can acquire a primary residence from up to 1-4 units for as low as 5% with conventional, as the regulation was approved last year of November 2023. You can also explore FHA with 3.5% down as well with 1.75% Upfront fee + anything with more than 3-4 units, there will be a SS rule (Self-sufficient test) to pass per FHA guideline.

If it is a legal multifamily unit, you can also use those vacant units as your rental income up to 75% of gross market rent.

[Raymond J. Rodrigues]

@Brandon Weis just an overly conservative bank. 3.5% down with FHA on up to 4 units. Must meet self sufficiency test for 3-4 units on FHA though, which alot of properties in higher cost areas do not meet.

Conventional allows 5% down on 2-4 units. Anything above and beyond what I mentioned is a bank and its own overlays. 

[Brandon Weis]

@Matthew Kwan Thanks Matthew! Also, the banks that did approve me told me that they could only use the rental income from the other units (75% of it) for an FHA loan, not a conventional with 5% down (which was my goal to avoid upfront PMI and have it automatically drop off at 78% LTV). Is that a national guideline or is that just more local bank conservative standards?

[Raymond J. Rodrigues]

@Brandon Weis, the reason and the only reason why they cannot use the rental income on the other units for a conventional loan is because you probably live rent free and don't have a housing expense. That is what the national guidelines call for. FHA does not have this rule.

[Matthew Kwan]

Quote from @Brandon Weis:

@Matthew Kwan Thanks Matthew! Also, the banks that did approve me told me that they could only use the rental income from the other units (75% of it) for an FHA loan, not a conventional with 5% down (which was my goal to avoid upfront PMI and have it automatically drop off at 78% LTV). Is that a national guideline or is that just more local bank conservative standards?

 It can be usable for both if you were vacating the units and there was a 12 month lease agreement. However, if you filed your rental income under schedule E, then lenders will have to use your the rental calc based on how you filed your schedule E. There are also some exceptions to convince the underwriters to use leases if there were major repairs for that house/unit proving that the schedule E numbers are not showing the full potential return, then you would be able to use the leases as an exception. 

[Raymond J. Rodrigues]

@Matthew Kwan, he is asking why the underwriters will not allow him to use the proposed rental income from the subject property at time of purchase. The only reason conventional will not allow it at all is if you do not have a current housing expense.