The Money Muse

If you’re looking to buy a home, an FHA loan can be an excellent option, particularly if you’re a first-time homebuyer or if you don’t have a large down payment saved up. An FHA loan is a government-backed mortgage that is designed to make homeownership more accessible, and it has several features that make it appealing to people who want to purchase a home with a lower down payment and more flexible qualifications. When combined with the house hacking strategy, an FHA loan can be a powerful tool to help you build wealth through real estate while minimizing your upfront costs.

What is an FHA loan?

An FHA loan is a mortgage insured by the Federal Housing Administration (FHA), which is a part of the U.S. Department of Housing and Urban Development (HUD). The primary purpose of the FHA loan is to make homeownership more affordable by reducing the financial barriers to entry. It’s a popular choice for first-time homebuyers, low-to-moderate-income buyers, and those who may not have the best credit score.

Some key features of an FHA loan include:

• Low down payment. With an FHA loan, you can purchase a home with as little as 3.5% down, compared to the typical 20% down payment required for conventional loans. This can significantly reduce the upfront cost of buying a home.
• Lower credit score requirements. FHA loans are more forgiving of lower credit scores. In many cases, you can qualify for an FHA loan with a credit score as low as 580, though some lenders may require higher scores.
• Competitive interest rates. FHA loans typically offer competitive interest rates, even for borrowers with less-than-perfect credit. This can help you save money over the life of your loan.

How can you use an FHA loan to your advantage when house hacking?

House hacking involves buying a multi-unit property, living in one unit, and renting out the others to cover the cost of the mortgage. When paired with an FHA loan, house hacking becomes a more accessible strategy for building wealth. Here’s how an FHA loan can help you leverage house hacking to your advantage:

1. Lower initial investment. One of the biggest challenges of house hacking is coming up with enough money for a down payment. With an FHA loan, you can buy a multi-unit property (up to four units) with as little as 3.5% down. This makes it easier to enter the real estate market and get started on your house hacking journey. For example, if you purchase a $400,000 multi-family home, your down payment would only need to be $14,000 (compared to $80,000 with a 20% down payment).
2. Generate rental income. FHA loans are available for properties with 2-4 units, meaning you can buy a duplex, triplex, or fourplex and rent out the other units. The rental income from these units can help cover your mortgage, property taxes, and insurance, allowing you to live in one unit while the others essentially pay for your living expenses. This is the essence of house hacking. By using an FHA loan, you can minimize your upfront costs and leverage the income from the other units to pay down your mortgage faster or invest elsewhere.
3. Live for less. The primary benefit of house hacking with an FHA loan is that it allows you to live for less. By renting out part of the property, you’re essentially having someone else pay your housing costs. This can free up a significant portion of your income that can be used for other financial goals like saving, investing, or paying down debt. It can also reduce the stress of living paycheck to paycheck and give you more financial freedom.
4. Build equity faster. Because you’re living in one unit and renting out the others, you can begin building equity faster than you would with a traditional single-family home. As you make mortgage payments and the property appreciates, the equity in your home increases. Over time, you can use this equity to purchase additional properties, refinance, or invest in other ventures.
5. Qualify for other loan programs. Once you’ve lived in the property for at least a year, you can use the rental income to qualify for other loan programs or expand your real estate portfolio. The rental income will be considered when evaluating your debt-to-income ratio, potentially allowing you to purchase additional properties with lower down payments and less risk.

What to consider when using an FHA loan for house hacking.

While an FHA loan can be an excellent tool for house hacking, there are a few things to consider before moving forward:

1. Owner-occupancy requirement. The FHA loan requires you to live in the property for at least one year before you can rent out all of the units. This is important to remember when planning your house hacking strategy.
2. Mortgage insurance. FHA loans require you to pay for mortgage insurance, both upfront and annually. The upfront cost is typically 1.75% of the loan amount, and the annual cost ranges from 0.45% to 1.05% of the loan balance. While this can increase your monthly payments, the ability to buy with a smaller down payment can make it worthwhile in the long run.
3. Maintenance responsibilities. Being a landlord comes with responsibilities, including maintenance, repairs, and tenant management. If you choose to house hack, you’ll need to be prepared to handle these tasks, whether on your own or by hiring professionals.
4. Property management. If you decide to rent out multiple units, you may need to manage tenants and handle any issues that arise. It’s important to establish clear rental agreements and understand landlord-tenant laws to ensure a smooth and profitable house hacking experience.

An FHA loan can be a game-changer for aspiring house hackers who want to reduce their living expenses, build wealth, and take their first step into real estate investing. With its low down payment requirement and accessibility for first-time buyers, it offers a path to homeownership that’s more achievable for many people. By purchasing a multi-unit property and living in one of the units, you can leverage rental income to cover your mortgage and accelerate your journey to financial freedom.

If you’re considering house hacking, an FHA loan could be the ideal financing option to help you get started on the path to financial independence. As with any real estate investment, it’s important to do your due diligence, evaluate your financial situation, and ensure that house hacking aligns with your long-term goals. Happy house hunting!