House hacking is an ingenious way for first-time homebuyers to get their foot in the door of real estate investing. By renting out part of a property you live in, you can cover your housing costs and start building equity. Using an FHA loan can make house hacking even more accessible, with low down payments and flexible guidelines.
In this comprehensive guide, we’ll explain what house hacking and FHA loans are the pros and cons of combining them and how to maximize your chances of approval. Whether you’re a millenial looking to stop “throwing away money on rent” or a young family needing more space, FHA-financed house hacking could be your ticket to financial freedom.
What is House Hacking?
House hacking involves buying a multi-unit residential property, then living in one unit while renting the others out. The rental income from your tenants helps cover or eliminate your housing costs
For example, you could:
- Buy a duplex and live in one unit while renting the other
- Buy a single family home with a basement apartment or accessory dwelling unit (ADU), and rent out the smaller unit
- Get a 3-4 unit building and rent out the other units
In most cases, your tenants would pay the mortgage, taxes, insurance, and maintenance on the property. You build equity without spending more on housing. It’s a win-win situation when done properly.
House hacking is one of the best ways to get started in real estate investing, for several reasons:
- Requires less money upfront than buying an investment property outright
- Minimizes risk because your housing is covered
- Generates monthly cash flow
- Gets you experience managing property and dealing with tenants
While house hacking isn’t for everyone, it can be a smart strategic first step, even if you plan on buying more traditional investment properties later. You get to “test drive” landlording at a very low cost.
What is an FHA Loan?
FHA loans are government-insured mortgages that require lower down payments and credit scores than conventional loans. Here are some key points:
- Down payments as low as 3.5%
- Lenient credit score requirements – usually 580+
- Offered by private lenders but insured by the Federal Housing Administration
- Ideal for first-time and low-to-moderate income homebuyers
Because they’re less risky for lenders, FHA loans offer better terms than many conventional mortgages. The trade-off is you have to pay mortgage insurance premiums. Still, FHA loans open the door for millions of buyers each year.
To qualify, you’ll need a steady income, clean credit history, and legal residency in the United States. Debt-to-income ratio must be below 43%.
Pros of House Hacking with an FHA Loan
Combining house hacking and FHA loans can be extremely beneficial for the right borrower. Here are some of the biggest advantages:
Low Down Payment
FHA loans only require 3.5% down on your primary residence. On a $200,000 property, that’s just $7,000 upfront versus $40,000 for a 20% down conventional loan. This lower barrier to entry is the #1 reason first-time investors choose FHA for house hacking.
Owner Occupancy Not Required on All Units
With FHA financing, you can buy a multi-unit property of up to 4 units. You must live in one, but the others can be rented out. No need to occupy more space than you need.
Low Credit Score Requirements
You can qualify for an FHA loan with a credit score as low as 580 if your other indicators are good. Conventional loans typically require scores of 620-680+. This helps borrowers who faced financial setbacks.
Lower Monthly Payments
Because of the low down payment, FHA loan payments are easier to fit in your monthly budget, especially early in your career. This improves cash flow.
Loan Assumability
FHA loans can be assumed by qualified buyers when you sell. This makes the property more appealing to other FHA buyers, widening the potential market.
Cons of Using an FHA Loan for House Hacking
FHA financing isn’t perfect, however. Here are some potential drawbacks to consider:
Mortgage Insurance
FHA loans require you to pay mortgage insurance premiums (MIP) for the life of the loan. On a $200,000 loan, this can add $200+ to your monthly payment. Conventional loans don’t have PMI after you reach 20% equity.
Refinancing Difficulties
Refinancing out of an FHA loan into a conventional loan is tougher than you may expect. You’ll likely need a much higher credit score and loan-to-value ratio. Many house hackers plan to refi after a few years to drop the MIP.
Lower Loan Limits
For 2023, the FHA loan limit for a single family home is $726,525. In expensive areas, you may need a conventional loan for larger properties. Jumbo loans have higher down payments.
Not Available for 5+ Units
You can’t use FHA financing to buy a property with 5 or more units. 4 units is the maximum, so you may be limited in terms of rental income potential.
Can’t Use for Investing Later
FHA loans require owner occupancy. You can’t buy multifamily properties just to rent out using FHA unless you live there first for at least a year. Plan to get a conventional investment loan later.
House Hacking with FHA Loans – Step-by-Step
If you want to house hack using FHA financing, here are some key steps:
1. Improve your credit score. Since FHA loans go to 580, you may already qualify. But the better your score, the more options you’ll have. Shoot for at least 620. Pay down debts and dispute errors to boost your score.
2. Save up your down payment. Shoot for at least 5% down if possible, to keep monthly costs lower. Shop low down payment mortgage programs like NACA too.
3. Find a good real estate agent. You need an agent experienced with multifamily homes. Interview a few until you find one you connect with.
4. Research neighborhoods and properties. Look for areas with strong rental demand and cash flow. Drive around and view potential properties. Aim for at least 1% rent-to-value ratio.
5. Make an offer and apply for financing. Once your offer is accepted, complete the FHA loan application with your lender. Make sure you have all required documentation.
6. Close on the property. Finalize the purchase after getting your financing secured. Then move into your unit and get tenants for the other units.
7. Manage the property. Take care of maintenance, repairs, vacancies, and other landlording duties. Build up reserves for future capital expenditures.
8. Consider refinancing later. After a few years of house hacking, you can refi into a conventional loan and drop the MIP once you have 20%+ equity.
Following this game plan will set you up for success on your FHA-financed house hacking journey!
5 Best House Hacking Strategies with FHA Loans
While simply renting out extra bedrooms can be considered house hacking, buying a multi-unit property with an FHA loan opens up more possibilities. Here are some of the best house hacking methods to leverage low down payment FHA financing:
1. Duplex House Hack
The classic duplex house hack involves buying a side-by-side duplex with an FHA loan, then living in one unit and renting the other. Screen tenant applications carefully and use a lease agreement. Duplexes offer the benefits of a single family home with added rental income.
2. Lock-off House Hack
Some single family homes feature a separate basement unit or apartment that can be closed off and rented out. You get built-in rental income but still have privacy and your own entrance. FHA loans allow this type of house hack.
3. Multi-Unit House Hack
One of the best aspects of FHA loans is you can buy a property with 2-4 units. For new investors, a triplex or fourplex allows rental income from Day One. Be sure to budget for higher maintenance and repairs. Screen tenants vigilantly.
4. Live-In Flip House Hack
With an FHA 203(k) rehab loan, you can buy a fixxer-upper home at a discount, live there while you remodel, then cash out through selling or refinancing. You get to live rent-free as your sweat equity builds value. Not for the faint of heart!
5. Shared House Hack
If you don’t mind housemates, using an FHA loan to buy a larger single family home you share with renters can work. Make sure permissions and shared areas are clear. Works best with friends or relatives looking for housing.
Pick the strategy that aligns with your risk tolerance and lifestyle. As long as you live in the property for at least a year an
Our process puts you in control.
Convenient online access makes it easy to achieve your financial and homeownership goals.
Estimate your monthly payment
See how much home you can afford
Estimate your amortization schedule
Start your home loan journey today.
There are a lot of great mortgage options out there, but you might not see them if you work with a big bank. As Canada’s premier mortgage broker, we help you find the best mortgage option for you.
House Hacking: How To House Hack Using A FHA Loan
FAQ
Can you use an FHA loan to house hack?
Why do sellers avoid FHA loans?
What is the 1% rule in house hacking?
What would cause a house to fail FHA inspection?
What are the benefits of house hacking?
House hacking offers numerous advantages. By renting out portions of your property, you can significantly reduce your monthly bills or even eliminate them entirely. Additionally, as tenants contribute to your mortgage payments, you build equity in your property faster.
Can you use an FHA loan for house hacking?
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?
How much money do you need to hack a house?
You don’t necessarily need a bunch of money to start a journey with house hacking. Low down payment options like FHA Loans require as little as 3.5% down and down payment assistance programs further alleviate initial costs. However, maintaining emergency funds is crucial for unexpected expenses.
What is house hacking & how does it work?
House hacking means finding ways to generate income from your home. Traditionally, house hacking meant buying a multifamily property, living in one unit and renting out the others so that the tenants pay the owner’s mortgage, and the owner builds equity while maintaining the property.