ScaredyCatGuide to Real Estate: FHA Loans - Five Things House Hackers Should Know
The use of FHA loans to get into a home with low money down has been a staple in the real estate industry for decades now. What has become even more popular in recent years is using it to purchase a multifamily home that the buyer plans to also occupy, widely known as house hacking.
In this post I will cover some key points to know when house hacking with the use of an FHA loan.
FHA Loans: Five Things House Hackers Should Know
1.) Down Payment
This one most everyone is aware of. With the FHA loan a buyer only needs 3.5% for a down payment, making it much easier to acquire a property for many people.
Here is the part you may not know - that down payment can be 100% gifted. A family member or anyone else who wants to help you out can provide these funds and all the lender usually requires is a letter from them stating that the funds are indeed a gift.
2.) Credit Score and Debt to Income
The minimum credit score to qualify for an FHA loan is 580. Be sure to always verify this as it can change, for example during the onset of covid-19 banks tightened up this and pushed the rate much higher.
Debt to income ratio is another win for FHA loans as it is higher than your typical conventional loan. 42% is the benchmark to meet as opposed to regular loans that have a more stringent ratio in the mid 30s.
3.) FHA Inspections
The inspections for FHA loans are an advantage for buyers. This is because the property must meet specific requirements to be approved for the loan. Properties need to be safe, secure and operational. This doesn't mean they need to be cosmetically pretty, but something like a active roof leak or leaking oil burner will need to be repaired by the seller for the property to get the stamp of approval.
What is great about this is it acts as a safety net for the buyer, which in many cases is a first time buyer with less experience than a savvy investor. Capital expenditure (CAP-EX) surprises shortly after acquiring a property can blow up your budget and the FHA requirements help reduce that risk.
4.) Self Sufficiency
Basically, this tests if the property can support itself. Say for example you are buying a 3 family property with a mortgage payment of $900. The rent from the 3 units must be $1,200 or more as the mortgage payment cannot be more than 75% or the total gross rents. The mortgage payment used in the ratio is the one including PITI (principle, interest, taxes, insurance).
The rental amounts are generally determined by the appraiser based on local market rents. Those amounts are submitted for all units, including the one you will live in.
5.) FHA Loans are Assumable
This is something I don't believe the majority of people know. It does come with some restriction though. "Under the HUD Reform Act of 1989, mortgages closed on or after December 15, 1989 require credit qualification of those borrowers wishing to assume the mortgage" according to the HUD website.
You may be asking what makes the beneficial? FHA loans typically come with low interest rates, some of the lowest you can get. If interest rates were to go up over time and loans are going off at 6 percent then a loan with a 2.75 percent rate seems awfully enticing. Rather than getting a new loan at the higher right a buyer could "assume" the loan and enjoy that much lower rate. This gives a seller more opportunity and leverage when looking to sell the property.
Conclusion
If you are looking to use an FHA to acquire a property, these are a few items you should be aware of, however there are many other items that make up this loan so be sure to work with you loan rep to ensure you understand all the requirements and options.
If you are thinking of house hacking to acquire a multifamily property but do not know how to go about it I've got you covered. Methods like this are exactly what I help my coaching students with. You can look into working with me here: ScaredyCatGuide Education
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