House Hacking (FHA 2-4 Units)
House hacking is the acquisition of a 2-4 unit multifamily property using an owner-occupied residential loan. By living in one unit and renting out the others, the rental income subsidizes or completely covers the mortgage.
The FHA Advantage (3.5% Down)
Commercial loans require 25% down. Conventional investment loans require 20% down. But if you intend to live in the property as your primary residence, the Federal Housing Administration (FHA) allows you to purchase a 1-4 unit property with just 3.5% down.
| Loan Type | Min Down Payment | Down Payment on $500k Triplex |
|---|---|---|
| Commercial/DSCR | 25% | $125,000 |
| Conventional (Investment) | 20% | $100,000 |
| FHA (Owner-Occupied) | 3.5% | $17,500 |
The "Self-Sufficiency" Test (3-4 Units Only)
If you are buying a 3-unit or 4-unit property with an FHA loan, you must pass the strict Self-Sufficiency Test. (This does not apply to single-family homes or duplexes).
The Rule:
75% of the total gross appraiser-estimated rental income from ALL units (including the one you will live in) must equal or exceed the total monthly mortgage payment (PITI + MIP).
In high-interest-rate or high-price environments, passing this test is the primary reason FHA triplex/fourplex deals fall out of escrow.
Using Rent to Qualify
Lenders allow you to use the projected rental income from the vacant units to help you qualify for the loan. Generally, they will add 75% of the appraised market rent of the other units to your personal W-2 income to calculate your Debt-to-Income (DTI) ratio. The 25% "haircut" accounts for anticipated vacancy and maintenance.
The Catch: Mortgage Insurance Premium (MIP)
The penalty for putting 3.5% down is mandatory Mortgage Insurance. Unlike conventional Private Mortgage Insurance (PMI) which drops off when you reach 20% equity, FHA MIP lasts for the life of the loan if you put down less than 10%. The only way to remove it is to sell or refinance into a conventional loan later.