What is the best loan for house hacking?

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Written By Robert Leonard

When you’re planning to house hack, or at least considering it, you probably start wondering, “What is the best loan for house hacking?”

The best loan for house hacking is generally an FHA loan if you’re buying a multifamily property (2-4 units). If you’re buying a single-family property, a conventional loan may be better.

Here’s why…

FHA Loans

FHA loans are often confused by people. They often think the “F” stands for “First-Time” and the “H” stands for “Homebuyer,” and no one ever knows what the “A” stands for. But, that’s not right.

FHA actually stands for Federal Housing Administration.

These loans are often used by first-time homebuyers, so the acronym is frequently confused, but an FHA loan isn’t only for first-time buyers.

FHA loans are loans that are insured by the Federal Housing Administration. The FHA protects the lenders (the bank who gives you a mortgage) against a loss if you don’t pay. The bank is protected by the FHA guaranteeing that they’ll pay the bank for the unpaid principal balance of your loan if you stop paying it. You still lose your house, but at least the bank gets its money.

I actually used an FHA loan on my 4th or 5th property.

While an FHA loan isn’t only for first-time homebuyers, you can only have one at a time. Meaning, if you have an FHA loan, you can’t buy another property using an FHA loan.

You’d have to refinance the first FHA loan using a conventional loan or sell that property to use an FHA loan again.

FHA loans also allow for only 3.5% as a down payment for properties with 1-4 units. This is important to keep in mind, and plays a big role in when you use an FHA loan versus a conventional loan.

Conventional Loans

When it comes to conventional loans, depending on your credit, single-family homes require a 5% down payment, 10% for a duplex (2 units), 15% for a triplex (3 units), and 20% for a fourplex (4 units).

You can probably see the difference here.

If you’re buying a fourplex to house hack, you could only put 3.5% down with FHA loan, but you’d likely have to put 20% down with a conventional loan.

This has a huge impact on how much you need to house hack.

In this case, it’s fairly clear – you’d likely want to use an FHA loan.

But, here’s where it gets tough.

What if you want to house hack again using a multifamily property? Say you buy your first multifamily property with an FHA loan for the low down payment and then you want to house hack a second time with a multifamily property.

Since you can’t have two FHA loans at the same time, you’d either have to refinance your first property into a conventional loan, sell the property, or not use an FHA loan for your second property.

Refinancing may not be an issue if you have equity in your home and interest rates haven’t gone up too much. This can be hard, though, because you have to have enough equity in your home to meet the down payment requirements for the property type you own. Meaning, if you own a fourplex that you want to refinance to a conventional loan, you’d have to have at least 20% equity, or you’d have to put money down. Also, if you locked in a low-interest rate with your FHA loan and interest rates have risen, you may be giving up a lower interest rate for a higher one. Not ideal.

Selling the property is possible (depending on market conditions), but it doesn’t allow for you to start building a portfolio of rentals (if that’s your goal).

Not using an FHA loan for the second multifamily is also possible, but you’ll have to be ready to pony up a much bigger down payment than you did on your first property.

My conclusion, how I approach it, is that I use a conventional loan for single-family house hacks and FHA loans for multifamily properties – that’s what I consider the best loan for house hacking.

It’s not a perfect solution, but I haven’t found a perfect solution yet.