Househacking: The Allure of FHA

     For many people, house-hacking provides an entry point into the wonderful world of real estate investment. There are some pros and cons to this approach however, and some things you should understand going in.

     For lenders, the dividing line between “single family” and “multi-family” is four units. If you are going to live on the property, you can use FHA funds to secure a single family home, a duplex, tri-plex, or a four-plex. Any home mortgage broker should be able to help you secure an FHA loan for a property with four or fewer units. With five units or more, you shift into a different loan category and cannot use FHA. You also will need a different type of lender at that point.

     The next thing to consider is if your outside income will support the mortgage. If you buy a duplex, triplex, or fourplex, the lender will count the income from the other units in the calculation as to whether you can afford the mortgage or not. Some people start their investment careers with a one unit home that has multiple bedrooms, and then they rent out the bedrooms. Be aware, however, that income of that sort will not be counted by the lender. The income has to be from a separate unit.

     If you go the FHA route to secure a property with a lower down payment, remember that you will have a higher monthly mortgage payment. It seems obvious, but remember that the lender will be looking to see if your income can support the mortgage. If you have a higher mortgage payment, along with higher mortgage insurance costs, you may find that even though you have the down payment, you still may not qualify for the mortgage. An FHA loan can allow a higher debt to income ratio, under certain conditions (namely, credit). So the strategy may work for you, just be aware the lender will be checking ratios before giving approval. It does take more than a down payment to get your funding request approved.

     Also consider that FHA funds come with more restrictive housing standards. To be approved, the property must be structurally sound and secure, and meet minimum health and safety standards. If you had hoped to buy, rehab, refinance, and rent the property, then you probably picked a fixer upper that needs some work. All that rehab that needs to be done may actually disqualify you from an FHA loan.

     An FHA loan is a wonderful tool that helps many people get started. Just be aware that having that 3.5% down payment is only the beginning of your route to loan approval.