Buying your first investment property can be an intimidating process Where do you start? How much money do you need upfront? What financing options should you consider? This is where FHA loans can be a game changer for aspiring real estate investors In this comprehensive guide, I’ll walk you through how to use FHA financing to “house hack” your way to real estate riches.
What is House Hacking?
House hacking is a creative real estate investing strategy where you buy a multi-family property, live in one unit, and rent out the others. This allows you to cover your housing costs while also generating rental income. It’s a win-win situation that minimizes your living expenses while building equity and cash flow.
The most common type of property for house hacking is a duplex, triplex, or fourplex. You live in one unit and rent the remaining units to tenants. The rental income pays for the mortgage, taxes, insurance, maintenance, etc. Effectively, you’re living for free or at a huge discount.
House hacking enables first-time homebuyers to get into real estate investing. You can purchase the property with a small down payment. Appreciation and principal paydown build your equity. Plus, you gain invaluable landlord experience.
Why Use FHA Loans for House Hacking?
FHA loans are government-backed mortgages that offer two major benefits for house hackers:
Low Down Payments – You can put as little as 3.5% down on an FHA loan. This reduces the cash needed to buy a property. With a conventional loan, you’d likely need at least 10-20% down.
Owner-Occupant Financing – FHA loans are designed for owner-occupants. This means you can qualify for the low down payment even though it’s a 2-4 unit building. The units just can’t all be rented out.
These factors make FHA financing ideal for house hackers ready to take the plunge into real estate investing. You get flexible lending requirements with small down payments and affordable rates.
Step-by-Step Guide to House Hacking with FHA
Follow these steps to execute a successful house hack strategy using FHA financing:
1. Find a Good Real Estate Agent
A knowledgeable real estate agent is invaluable for navigating the house hacking process. Find someone experienced with investment properties and FHA loans. They’ll help you identify suitable properties and submit compelling offers.
Ask friends/family for recommendations. Interview a few agents before selecting one you connect with. Make sure they clearly understand your house hacking goals.
2. Get Pre-Approved for an FHA Loan
Initiate the mortgage process by getting pre-approved for an FHA loan. This shows sellers you’re a serious buyer with financing lined up. Connect with a lender familiar with FHA investment loans.
Getting pre-approved also gives you a budget for your property search. You’ll know the maximum purchase price you can afford based on your income, debts, and down payment amount.
3. Search for Good House Hack Properties
Conduct an extensive search for solid house hacking opportunities in your target locations. Focus on duplexes, triplexes, and fourplexes priced within your pre-approval amount.
Prioritize properties in move-in condition that don’t require major renovations. Also examine the rental rates to ensure adequate cash flow potential. Pay close attention to the 1% rule (monthly rent ≥ 1% of total property value).
4. Make an Offer and Negotiate
Once you find a property that meets your criteria, it’s time to make an offer! Your agent will help you submit a competitive bid and negotiate any counteroffers. Highlight that you have an FHA pre-approval – this makes your offer more desirable to sellers.
It’s smart to include an inspection contingency so you can thoroughly assess the property’s condition during due diligence. Be prepared to act decisively if your offer is accepted.
5. Close on the Property & Begin Renting
The final step is closing on the purchase, moving into your unit, and renting out the other units. Your lender and agent will handle all the closing logistics. Marketing the vacant units is your next priority.
Carefully screen tenant applicants and sign leases. Collect security deposits and first month’s rent. Once you have tenants paying rent, you’ll be house hacking successfully!
Key Tips for House Hacking with FHA
Keep these tips in mind to maximize your chances of FHA house hacking success:
- Shop fixed-rate mortgages – Avoid unpredictable ARM loans. Lock in a low fixed rate.
- Highlight owner-occupancy – Emphasize to sellers you’ll be living there to ease concerns.
- Inspect thoroughly – Verify the property condition to avoid big issues.
- Build emergency reserves – Have 6+ months of mortgage payments saved up.
- Tenant screen rigorously – Don’t compromise on tenant qualifications.
- Understand landlord rules – Follow all laws and best practices.
- Appreciate the perks – Enjoy your new investment and almost “free” housing!
Why The Investing Circle Recommends FHA House Hacking
Here at The Investing Circle, we’re huge proponents of house hacking with FHA loans as a gateway to real estate wealth. I’ve used this strategy myself to buy a duplex early in my investing journey.
The unbeatable combination of low down payments, owner-occupant status, and below-market housing costs provides an ideal launchpad for first-time investors. We’ve seen clients deploy FHA house hacking to amass impressive rental portfolios.
Yes, it takes work and perseverance. But the long-term payoff can be life changing. House hacking truly embodies savvy financing and passive income generation.
We’re here to guide you each step of the way on your FHA house hacking journey. Our expertise will maximize your success and minimize headaches. Let us help you leverage FHA loans to hack your way to financial freedom!
FHA Credit Score Requirement
Before we get to the credit score requirement for an FHA loan, it’s important to first discuss FICO® scores. A FICO score is a three-digit number based on an individual’s credit report, and it help lenders determine a homebuyer’s creditworthiness. However, it’s important to note that different versions of the FICO score exist based on different scoring models. A FICO score also helps lenders determine how likely you’ll pay back your mortgage payments on time. FICO calculates a score using percentage weights based on your payment history (35%), amounts owed on loans (30%), credit history length (15%), new credit accounts (10%), and credit types used (10%). Typically, the better your FICO credit score, the better your home loan’s interest rate. FICO’s scoring ranges:
- Exceptional: 800-850
- Very good: 740-799
- Good: 670-739
- Fair: 580-699
- Poor: 300-579
To qualify for an FHA loan, you need a minimum credit score of 500, which is much lower than for conventional home loans, but it comes with a higher down payment requirement. You can learn more about the difference between an FHA loan and conventional loans here.
| Term | Rate “As Low As” | APR* “As Low As” | Example Loan Amount | Example Monthly Payment |
|---|---|---|---|---|
| 15 Years | 6.500% | 6.700% | $200,000 | $1,742.21 |
| 30 Years | 7.000% | 7.125% | $200,000 | $1,330.60 |
HOME LOANS: Rates based on creditworthiness. Mortgage loans are originated by Space Coast Credit Union and are subject to credit approval, verification, and collateral evaluation. Programs, offers, rates, terms, and conditions are subject to change or cancellation without notice. Certain restrictions apply. Taxes and insurance not included; your actual payment obligation will be higher. These mortgage loan programs constitute first mortgage liens secured by the home and property. Your down payment is determined by the Loan-to-Value ratio. (90% LTV = 10% down payment). Loans exceeding 80% of the appraised value of the home require private mortgage insurance. Member responsible for any funds needed for closing costs and pre-paid escrow.
What are the FHA loan property requirements?
Be sure that the property you plan to purchase meets FHA loan requirements before applying too. The property can be for a single-family home (detached, condo, townhouse), a multi-family home with up to four units (as long as you live in one of them), or a manufactured home on a permanent foundation. It cannot be for an investment property or a house flip. The property must be for a primary residence (where you live the majority of the time), and at least one borrower must occupy the property within 60 days of closing. The borrower must also take title to the property in their own name or in the name of a living trust at settlement.
House Hacking a Duplex with an FHA Loan *Hard Money Part 1*
FAQ
What will disqualify you from an FHA loan?
What is the minimum credit score for a FHA loan?
Does FHA allow investment purchases?
Can you use rental income for an FHA loan?
Can I use an FHA loan for investment?
Using FHA Loans for Investment: The key to using an FHA loan for investment is the commitment to treat one unit of a multi-unit property as your primary residence for at least a year. This means you must live in one of the units, turning the property into a primary residence before considering it for investment purposes.
Can FHA loans fund real estate investments?
Given their constraints, FHA loans are not typically used to fund real estate investments. As noted though, there are exceptions to the FHA investment property guidelines. Some investors will use an FHA loan to buy a multiunit or multifamily property of up to four units.
What are FHA loans?
FHA loans are government-backed mortgages, insured by the Federal Housing Administration and designed to create a more accessible path to homeownership, particularly for first-time buyers.
What is an FHA loan & how does it work?
An FHA loan is a home loan guaranteed by the federal government. Traditional lenders make these loans to those who meet the requirements and the government guarantees them. How to Invest in Real Estate Without Buying Property. When you use an FHA loan, you only need a 3.5% down payment. On a $300,000 property, that’s $10,500.