{"id":151,"date":"2023-06-12T23:25:26","date_gmt":"2023-06-13T04:25:26","guid":{"rendered":"https:\/\/househackhelp.com\/?p=151"},"modified":"2023-06-12T23:25:27","modified_gmt":"2023-06-13T04:25:27","slug":"essential-guide-to-house-hacking","status":"publish","type":"post","link":"https:\/\/househackhelp.com\/essential-guide-to-house-hacking\/","title":{"rendered":"The Essential Guide to House Hacking: Everything You Need to Know"},"content":{"rendered":"\n

House hacking is a popular real estate investing strategy, and for good reason.<\/p>\n\n\n\n

A house hacking homeowner can dramatically reduce his or her housing costs, if not completely eliminate them.<\/p>\n\n\n\n

Everything You Need to Know About House Hacking<\/h1>\n\n\n\n
\"Side<\/figure>\n\n\n\n

What is House Hacking?<\/h2>\n\n\n\n

House hacking is when someone rents out extra space in his or her home while living in it.<\/strong><\/p>\n\n\n\n

It’s a simple real estate investing strategy.<\/p>\n\n\n\n

And it’s particularly good for beginners<\/a>.<\/p>\n\n\n\n

By renting out the extra space, a homeowner can offset his or her housing costs.<\/p>\n\n\n\n

In an ideal case, the entire mortgage, utilities, and any taxes are entirely covered by the rental income.<\/p>\n\n\n\n

That homeowner gets to live without having to worry about covering housing costs.<\/p>\n\n\n\n

House hackers typically buy a 1 to 4 unit building, live in one unit (or bedroom) and rent out the remaining units (or other rooms).<\/p>\n\n\n\n

By living in the property, this often grants house hackers excellent financing options. Let’s go over those now.<\/p>\n\n\n\n

Financing Options for House Hacking<\/h2>\n\n\n\n
\"Financing<\/figure>\n\n\n\n

One of the best things about house hacking is its access to amazing financing.<\/p>\n\n\n\n

Since house hackers lives in the property, they generally have access to owner-occupied financing. These loans typically have the best loan terms out there.<\/p>\n\n\n\n

Owner Occupied Loan Options<\/h3>\n\n\n\n

And “owner-occupied loan” is one that requires you to live in the property for some length of time.<\/p>\n\n\n\n

Owner-occupied loans tend to have some of the best mortgage terms possible.<\/p>\n\n\n\n

They can be either fixed-rate<\/em> or variable rate<\/em>.<\/p>\n\n\n\n

Fixed-rate mortgages have an interest rate that remains the same for the life of the loan, so your monthly payments will never change.<\/p>\n\n\n\n

With an adjustable-rate mortgage (ARM), the interest rate can fluctuate up or down over time, and your monthly payments will change accordingly.<\/p>\n\n\n\n

Whatever the case, let’s review some of the common owner-occupied loan options used by house hackers.<\/p>\n\n\n\n

Loan Type<\/th>Min. Down Payment<\/th>Interest Rate<\/th>Mortgage Term<\/th>Mortgage Insurance<\/th>Prepayment Penalty<\/th><\/tr><\/thead>
Conventional<\/td>5%<\/td>Fixed\/Adjustable<\/td>15-30 years<\/td>PMI until 20% equity<\/td>Varies<\/td><\/tr>
FHA<\/td>3.5%<\/td>Fixed\/Adjustable<\/td>15-30 years<\/td>Permanent MIP<\/td>None<\/td><\/tr>
VA<\/td>0%<\/td>Fixed\/Adjustable<\/td>15-30 years<\/td>None<\/td>None<\/td><\/tr>
USDA<\/td>0%<\/td>Fixed<\/td>30 years<\/td>None<\/td>None<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

1. Conventional Mortgages<\/h4>\n\n\n\n

Conventional mortgages are the most common type of mortgage used to purchase a home. They\u2019re typically available with either a fixed or adjustable interest rate and have a repayment term of 15 to 30 years.<\/p>\n\n\n\n

A conventional mortgage can be “conforming” or “non-conforming.”<\/p>\n\n\n\n

Generally speaking, confirming loans are ones that follow very specific guidelines set by the federal government that allow lenders to sell the loan to a government entity (like Fannie Mae or Freddie Mac).<\/p>\n\n\n\n

Non-confirming loans do not necessarily follow the same guidelines and thus might vary more widely in their structure and terms.<\/p>\n\n\n\n

Most house hackers will be able to qualify for a conforming conventional loan. These will typically be fixed-rate, 30-year loans only requiring a 5% down payment.<\/p>\n\n\n\n

However, if the down payment is below 20%, a buyer will typically have to pay private mortgage insurance<\/em> (PMI), which is an extra payment on top of the regular mortgage payment.<\/p>\n\n\n\n

The PMI amount can vary by lender, but usually equals only a small percentage of the existing mortgage payment.<\/p>\n\n\n\n

And PMI for a conventional mortgage will drop off once a borrower reaches 20% equity based on the purchase price of the property, so it’s not permanent. Usually, a borrower can also ask for an appraisal to check to see if the property has appreciated to the point that he or she has reached that 20% threshold.<\/p>\n\n\n\n

2. FHA Loans<\/h4>\n\n\n\n

FHA loans are government-insured loans that are available to both first-time homebuyers and existing homeowners.<\/p>\n\n\n\n

They’re one of the most popular options for house hackers.<\/p>\n\n\n\n

FHA loans offer a 3.5% down payment with a low, fixed interest rate over 30 years. This makes them a powerful tool for getting into a piece of real estate with very little down.<\/p>\n\n\n\n

There’s even a special FHA loan through the FHA 203(k) program. FHA 203(k) loans allow buyers to finance the cost to rehab the property as well. Here’s an overview of FHA 203(k) loans and how to use them<\/a>.<\/p>\n\n\n\n

FHA loans typically have more relaxed credit requirements compared to other loan programs. So that’s another plus for someone who doesn’t have extensive positive credit history already.<\/p>\n\n\n\n

However, with FHA loans, there is a extra monthly insurance payment that a borrower will have to make for the entire life of the loan. This is called “Mortgage Insurance Premium<\/strong>,” or “MIP<\/strong>” for short.<\/p>\n\n\n\n

MIP can only be removed if the borrower pays off the loan or refinances to a non-FHA loan.<\/p>\n\n\n\n

Because of this, many borrowers prefer to use a 5% down payment conventional loan rather than an FHA loan since PMI on a conventional mortgage is not permanent. And the difference in required down payment is often rather small.<\/p>\n\n\n\n

Nevertheless, the FHA mortgage program remains a powerful way to get started with house-hacking.<\/p>\n\n\n\n

3. VA Loans<\/h4>\n\n\n\n

VA loans are another great financing option for house hackers. These loans are offered through the Department of Veterans Affairs and are available to military veterans and their families.<\/p>\n\n\n\n

VA loans offer a host of benefits, including:<\/p>\n\n\n\n

    \n
  1. No down payment required<\/li>\n\n\n\n
  2. Low, fixed interest rates<\/li>\n\n\n\n
  3. Lenient credit requirements<\/li>\n\n\n\n
  4. Funding for renovation and repairs<\/li>\n\n\n\n
  5. No mortgage insurance premiums<\/li>\n\n\n\n
  6. Limited closing costs<\/li>\n\n\n\n
  7. Pre-payment penalties waived<\/li>\n<\/ol>\n\n\n\n

    Of course, this great financing option is only available to veterans, so not every house hacker has access to it. But, if you are a veteran, it’s a powerful tool.<\/p>\n\n\n\n

    4. USDA loans<\/h4>\n\n\n\n

    USDA loans are available to some house hackers as well. These loans are offered through the U.S. Department of Agriculture and are available to rural homeowners.<\/p>\n\n\n\n

    To qualify for a USDA loan, you must:<\/p>\n\n\n\n