Hello BP!
This is NOT going to be a breakdown of what house hacking is and how to do it. There’s already plenty of information out there and besides, I’m not an expert.
BUT, what I am is a beginner who came across a little-talked-about speed bump when trying to house hack a duplex. (More like a hurdle that extended my closing by over 40 days…)
So here it is:
For most first-timers, the reason we choose to house hack is because we don't have loads of up-front capital to make a large down payment on a property. The fact that an FHA loan will allow you to utilize their 3.5% down on up to 4 units is exactly what attracted me, and many of us, to house hacking in the first place.
But, little did I know!
If you are going to have a non-occupant co-signer who helps you qualify for your 2-4 unit property, you may not be able to take advantage of that 3.5% down, but instead, be required to put down a whopping 25%.
In my scenario, I had enough money from diligent savings during college for the down payment as well as 3 months of reserves, but was just shy on the qualifying income side for the property I wanted. This property was “technically” a single family residence, since that’s how it was zoned with the county, but actually had two functioning units, upstairs and downstairs. (Separate entrances, two kitchens, separate utilities, etc.)
The first speed bump came with the appraisal. When the appraiser got to the property, he refused to complete the appraisal as an SFR, and instead, wanted to classify this property as an up-down duplex because of the above-mentioned characteristics.
Normally, this would be no problem. FHA allows 3.5% down on 1-4 units...UNLESS YOU HAVE A NON-OCCUPANT CO-SIGNER.
And so, my loan officer worked for about 10 days to find another appraiser who was willing to categorize the property as a single family (again, that’s how it was zoned with the county, and because of the layout, locking or unlocking one door at the base of the stairs makes either the entire home accessible to one family, or splits it into separate units.)
The seller agreed to wait for this appraisal, and luckily, the new appraiser classified the property as an SFR, but once the loan got to underwriting, the FHA-board decided that due to the upstairs kitchen and the completely separate utilities, this home would STILL be classified as a duplex, and therefore, with a non-occupant co-borrower, I'd be required to put down 25%.
This is probably a good point to mention that I’m using a first-time home buyer program for the state of Oklahoma, which gifts you 3.5% for your down payment. Therefore, even though I had the money in the bank for the DP, I didn’t actually have to use it. This extended the amount of reserves I had in the bank, and was also part of the reason I felt comfortable with having a co-signer to qualify for a slightly larger/more expensive property.
So now, I had a decision to make. I couldn’t afford to put down 25%, so I could let the property go (financing contingency was included in our contract), OR, I could remove the upstairs kitchen and combine one of the utilities.
The sellers were obviously getting antsy at this point, but they were a lovely couple who’d rehabbed the home themselves and I’d created good rapport with them and kept them up to date during the whole process. They ended up putting the house back on the market, but gave me and my lender another week to figure things out and keep the property.
In the end, it cost me just $1,000 to combine the electric meters, as well as remove the upstairs dishwasher and oven, as well as cap the gas line. The appraiser came back to the home, verified that we had now converted the property to an SFR, and approved us for closing.
From there, it only took about 48 hours for me to close on the home, and it was especially sweet to have the State of Oklahoma pay my 3.5% down payment for me!!
Thanks for reading and if you'd like more content about the first year of my REI journey.
