What Loan To Use On A House Hack?

In order to house hack, you need property. That’s pretty obvious. However, the financing you use to purchase your property can change how profitable or viable your potential house hack is. So, in this post, I’m going to talk about what loan to use on a house hack – as well as the different types of loans and how they affect house hacking.

Before I dive into the details, let me answer your initial question first.

You should use whatever loan or financing allows you to house hack quickly and profitably.

Using an FHA loan for house hacking

FHA loans are a popular choice for first-time homebuyers and house hacking due to their low down payment option.

Here are a couple of benefits of using an FHA for house hacking :

• You’re able to use a down payment that’s as low as 3.5%
• Your credit score can be as low as 500

FHA loans allow you to start house hacking much sooner than you could if you were focused on improving your credit and saving the “recommended” 5%-20% down payment.

With that said, FHA loans come with negatives that you have to consider as well – for example:

• Properties that you want to purchase must meet FHA guidelines
• You will have to pay mortgage insurance unless you refinance the loan
• Property owners may choose offers from people using other loans
• There are limits on how large your loan can be

Using an FHA 203K loan for house hacking

An FHA 203K loan is basically a regular FHA loan that allows you to bundle the cost of renovations into the loan. If you’re a first-time homebuyer or new to house hacking, I wouldn’t recommend an FHA 203K loan.

It’s not that the loan is inherently bad (because it’s a solid loan) but it comes with additional work that most people are not prepared for – renovating/remodeling.

In this house hacking guide, I talk about how you should avoid major foundation issues. The reason I say avoid major foundation issues is similar to why I wouldn’t recommend an FHA 203K loan – you’re going to have to put in a lot of work (and stress), possibly before you even start the house hacking.

If your goal is to house hack – it’s better to purchase a property that doesn’t require a lot of extra work and not add on a lot of additional work in the beginning.

Using a conventional loan for house hacking

When purchasing a home, most people are going to use a conventional loan.

When I purchased my duplex, I used a conventional loan. I had initially planned on buying a property using an FHA loan since I could utilize a low down payment and have more cash on hand for renovating or in case something went wrong. But, as I mentioned in the FHA section, FHA loans have requirements that all properties must meet. And the majority of the properties I looked at in my area, especially multifamily properties, were not able to meet them.

Some of the benefits of using conventional loans for house hacking include:

• Down payments are as low as 3% (not commonly used in my area). The most common low down payment amount in my area starts at around 5%.
• More likely to have a lower interest than FHA
• You have flexibility in the type of properties you purchase

Using a VA loan for house hacking

If you’re a military veteran and have access to VA loans, they’re a good choice for house hacking.

I haven’t used VA loans personally (surprise, I’m not a military vet) but I have talked with many of my friends and family about VA loans and there are a few benefits that make them attractive for house hacking:

• No down payment is required. This might make your house hack less profitable (or possibly not profitable at all) but it’s great to have the flexibility to choose how much you want to put down. In addition to the added flexibility, you can also purchase a property to house hack sooner than if you needed to save 3%+ for a down payment.
• There’s no private mortgage insurance (PMI). This should help increase the cash flow of your house hack and is a benefit that you wouldn’t get with any of the loans I talked about above.
• VA loans may have slightly lower interest rates. This will depend on your specific lender but it’s not uncommon for VA loans to have better rates.

Using a USDA loan for house hacking

USDA loans are not good loans for house hacking.

The first thing that makes USDA loans bad for house hacking is that you’re required to live in the property for 12 months before you can allow non-family members to live in the property full-time (source). For most people, this eliminates USDA loans from even being an option for house hacking. But, if for some reason you were planning on only house hacking with family members – this disadvantage may not affect you.

Another aspect of USDA loans that makes them bad for house hacking is that you can only purchase properties in “eligible areas” (use this map to see what areas are ‘eligible’). Most of the eligible areas are rural and this means that it may be difficult to find good renters in an area that is less densely populated.

Using “hard money” loans for house hacking

I don’t recommend using hard money loans for house hacking unless you’re:

1. Experienced with your local real estate market and the value of property
2. Hiring an experienced real estate attorney to help with contracts
3. Hiring a CPA who’s familiar with house hacking and hard money loans, who can give tax advice beforehand
4. Ready with a plan on either paying your hard money loan back quickly or refinancing into a conventional loan so you can pay the hard money loan.

Overall, if you don’t have experience with hard money loans and real estate investing – I don’t recommend them. However, if you had to get some kind of hard money loan and you don’t have previous experience – try to only get a hard money loan for the down payment so you can secure more traditional financing.

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