House hacking is one of the best ways for young real estate investors to get their foot in the door with their first property. As we discussed in our complete house hacking guide, this method minimizes risks while opening up the possibility of appreciation, cash flow, and simply being able to purchase a property in markets where it would be hard to budget the expense in otherwise.
While FHA loans are most well known as a tool for first time homeowners to buy their first house, these can also be used for multi-unit properties and are a fantastic way for beginning investors to get their start with a first property.
Using an FHA loan for house hacking is an outstanding way to start off in real estate and can be effective for a single family property or, as many new real estate investors are surprised to find out, these loans can be used for multi-unit properties.
Let’s dive into the best ways to house hack with an FHA loan!
What is an FHA Loan?
An FHA loan is a special type of government-backed mortgage that is insured directly by the Federal Housing Administration. These are popular because they often require lower credit scores and much lower money down than a conventional bank loan.
This can make home buying accessible for many individuals who otherwise wouldn’t be able to scrape together enough money for a conventional down payment, and is often the go-to program for individuals or families looking at a first house.
The Department of Housing and Urban Development’s page on FHA loans gives the basics and links to up to date information on various loans that are available in the program, while this article from Experian does a great job of describing an overview of specific requirements for less conventional FHA loans.
FHA Loans of Note:
- 203B Basic Home Mortgage Loan – The most well-known FHA loan allowing first-time property buyers to buy with 3.5% down with lower interest rates and credit criteria than conventional bank backed mortgages
- 203K Rehab Mortgage Loan – Loan for improving properties or units before renting
- FHA Energy Efficient Mortgage – Mortgage or refinance loan designed to help borrowers get money to update the home with green energy like solar panels
- 203H – Provides low cost mortgages to disaster victims to help rebuild after a natural disaster or buy a new home entirely
- Good Neighbor Next Door Loan – Rare program that allows professionals like teachers, firefighters, or law enforcement to buy a home for 50% off in certain areas being revitalized.
House Hacking with an FHA Loan
The most popular FHA loan is the 203B for first-time home buyers, bringing the bar down to 3.5% up front as opposed to the conventional 10-20% and allowing buyers with a much lower credit score to get funding for buying their first home.
This is an excellent loan to use with a house hack since this makes the barrier to entry much lower for a first property. There’s also the fact that the 203B FHA loan can be used for a property of up to 4 units meaning Multi-Family houses, Duplexes, Triplexes, Townhouses, Multi-Unit Condos, all of these are viable properties to buy with this type of FHA loan.
So grab a reliable house hacking calculator, punch in the numbers for all these property types, and see what type of numbers you’re coming back with.
You need to live in the property for at least one year, but with a house hack that would have been something you were planning to do anyway, making it a requirement that shouldn’t cause any issues.
Pros of Using an FHA Loan
- Requires 3.5% down instead of 10% or 20%
- Lower credit score needed to get loan
- Often has lower interest rate than conventional loan
- Lowers the barrier of entry for buying a property
Cons of Using an FHA Loan
- The monthly payments will often be much higher than with a conventional loan thanks to the lower down payment and required insurance
- Additional costs from insurance will make cash flow difficult early on
- Refinancing might be required prior to buying a second property in some situations
Can You House Hack Multi-Unit Properties with an FHA Loan?
As long as the property is 4 units or less it qualifies for an FHA-backed loan. You can’t buy any property that has 5 or more units, but a duplex, triplex, or even 4 unit multi-family all fall under the terms for an FHA loan with the caveat that you are still expected to be living in one of the units.
That means that you can by a duplex with an FHA loan, a multi-unit condo or town house, a triplex, anything at all with four or fewer units.
Many first time property buyers don’t know this and miss out on the chance to purchase a property that is already primed for house hacking, and that is a shame.
Can You Buy Investment Properties with an FHA Loan?
Generally speaking you can buy investment properties with an FHA Loan, as long as core conditions for the loan are meant.
For most investors this comes down to two things:
- Living in one of the units for a minimum of one year
- Making sure the investment property has 4 units or less as anything with 5+ units is ineligible for an FHA loan
As long as those two main points are met then there’s no reason an FHA loan can’t be used to buy a multi-unit investment property. In many cities the best option is going to be house hacking a duplex with an FHA loan, but depending on how old the city is and various historical influences, triplexes and 4-unit multi-family houses might be fully in play.
As long as the other numbers work out so you can afford it, and this includes being able to use 70% of expected rent to determine how much of a loan you qualify for.
Also keep in mind that there might be upper limits to what you can get from an FHA loan depending on your geographic location, so that’s something to check out to know if there are hard limits in place before you go property hunting.
What If the FHA Won’t Approve a Loan for a Property I Want to Fix Up?
In this situation, make sure you’re applying for the right FHA loan. The most popular FHA loan is for first-time home buyers purchasing a property that is move-in ready. If you’re looking for a fix it up job there are options, but that actually requires a different type of FHA loan.
For example the 203b is the designation for a “normal” FHA loan, the one almost everyone is referring to when they use the term “FHA loan.”
However, there are multiple types of FHA loans and it’s the 203k loan that allows the buying of a property that otherwise wouldn’t be financed. Making sure you have the right application in will drastically increase your chances of success.
Keep in mind that the contract work must be done with a HUD approved contractor, so keep that in mind since you will likely not be able to completely rehab the property yourself. Make sure your plans take that requirement into consideration, but this is an option.
Can I Apply for More Than One FHA Loan?
The main FHA loan is a one-time deal meant for the first property purchase. That means this is a one-time use, although based on life circumstances there are some other types of loans the Federal Housing Administration offers that could apply, but these are not used for normal house hacking purposes.
It’s important to choose a good first property because generally speaking you’ll get one FHA loan to kick things off and after that it will take your own income, skills, and credit in order to get another property.
FHA Loan House Hacking FAQ
That’s all you need to know about getting started with an FHA loan for house hacking, so I’m going to end the article answering some common questions that seem to come up frequently when looking at using an FHA loan for house hacking.
Why can’t I buy a 5-unit property with an FHA loan?
At it’s heart the main point of these FHA loans is to help non-homeowners become homeowners. It’s not hard to justify duplexes or multi unit houses for large families to a point, but at 5 units plus it’s clearly moving to investment and they don’t want the program abused.
Why was I denied an FHA loan?
While it’s much easier to get FHA loans than conventional loans, there are still some requirements and if you didn’t qualify the most likely reasons are very bad credit, a debt-to-income ratio that’s too high, and not having enough money to cover the costs associated with buying a property.
Will they get angry if they find out I’m house hacking with an FHA loan?
Assuming “they” is HUD, no. The property is yours if you qualify. As long as you are living there as a primary residence, whether or not you rent out other units or rooms has nothing to do with the loan and the progam.
The only way to potentially get in trouble would be if they found out you were never living there – which would be a violation of the borrowing agreement.
Where can I find an FHA lender?
Easy – just contact HUD to get a look at the official list of FHA-approved lenders in your area.