Intro to house hacking with FHA financing

If you're a first-time homebuyer, you may be wondering how you can afford to buy a home in today's expensive real estate market. I'm a real estate agent in Los Angeles where it's just harder and harder to purchase home. One strategy I always recommend is called house hacking! In short, house hacking is a term that refers to buying a property and renting out a portion of it to generate income (duplex or small multi-family of 3 or 4 units) And here's why it's a good idea for first-time homebuyers.

The idea behind house hacking is to offset the cost of the mortgage and other expenses associated with homeownership by generating rental income from the other units in the property.

For example, if you purchase a duplex and live in one of the units, you can rent out the other unit to a tenant. The rental income you receive can be used to offset your mortgage payments and other expenses associated with the property, such as property taxes, insurance, and maintenance costs.

Why is House Hacking a Good Idea for First-Time Homebuyers?

1. Generate Rental Income

One of the main benefits of house hacking is that it allows you to generate rental income. The rental income you receive can help offset your mortgage payments and other expenses associated with homeownership. This can be particularly beneficial for first-time homebuyers who may have limited funds to cover the costs of owning a home.

1. Build Equity

Another benefit of house hacking is that it allows you to build equity in a property. As you make mortgage payments, the amount of equity you have in the property increases. This can be an excellent way to build wealth over time.

1. Control over your living situation

When you're renting, you're subject to the rules and regulations of your landlord. When you own a home, you have more control over your living situation. You can choose who you rent to, how you maintain your property, and when you make upgrades. This can lead to a more comfortable and fulfilling living situation.

1. Reduced Living Expenses

By renting out the other units in your property, you can significantly reduce your living expenses. This can be especially beneficial for first-time homebuyers who may be struggling to cover the costs of homeownership.

1. Flexibility

House hacking also offers a degree of flexibility that other real estate investment strategies do not. If you decide that you no longer want to live in the property, you can simply move out and rent out the entire property to tenants. Alternatively, you can sell the property and use the equity you have built up to invest in another property or use the money for other purposes.

1. Learn about real estate investing

House hacking is a great way to learn about real estate investing. As a landlord, you'll learn about tenant screening, lease agreements, property maintenance, and more. You'll also gain experience in managing rental properties, which can be valuable if you decide to invest in real estate in the future.

1. Tax Benefits

Finally, house hacking can offer significant tax benefits. For example, you can deduct mortgage interest, property taxes, insurance premiums, and other expenses associated with the property from your taxable income. This can result in significant savings at tax time.

How to finance your first purchase?

I highly recommend to all my clients to take advantage of FHA financing with as little as 3.5% down payment. Financing a small multi-family property using FHA financing can be a great option for first-time real estate investors or those who want to use a lower down payment and less stringent credit requirements. Here are the steps to finance a small multi-family property using FHA financing:

     1.Determine the property's eligibility

To use FHA financing, the property must meet certain eligibility requirements, including:

• The property must have 2-4 units
• The borrower must occupy one of the units as their primary residence
• The property must meet minimum property standards (MPS) set by FHA, such as having adequate heating, electrical, and plumbing systems
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• 2.Meet the borrower requirements

To be eligible for FHA financing, borrowers must meet certain requirements, including:

• A minimum credit score of 580
• A maximum debt-to-income ratio of 50%
• A minimum down payment of 3.5%

1. 3.Find a lender

Once you have determined that the property is eligible and you meet the borrower requirements, you will need to find a lender who offers FHA loans for multi-family properties. Take advantage of your Realtor's knowledge and expertise to recommend you a lender who he/she already worked with, as FHA purchases are not the easiest to finance. Even small things like peeling paint can be an issue and may have to get fixed before close of escrow. Hence you need a good, experienced Realtor and lender on your team. 

1. 4. Apply for the loan

To apply for an FHA loan, you will need to provide the lender with documentation of your income, assets, and credit history. FHA is a full documentation loan and I strongly suggest to get solid pre-approval before even considering the purchase.

1. 5.Close the loan

Once your loan is approved, you will need to sign the loan documents and provide any additional documentation required by the lender. You will also need to pay closing costs, which can include appraisal fees, title fees, and other charges associated with the loan.

     6.Don't miss your supplemental tax bill

A supplemental tax bill is an additional property tax bill issued by the local government to reflect changes in the assessed value of a property. It's usually triggered when a property is sold or undergoes improvements, such as additions or renovations. The purpose of the supplemental tax bill is to adjust the property tax amount to reflect the new value of the property.

In a nutshell, house hacking is an excellent investment strategy for first-time homebuyers who want to generate rental income, build equity, reduce living expenses, and enjoy flexibility in their real estate investments. By purchasing a multi-unit property and renting out the other units, you can build wealth over time while enjoying the benefits of homeownership