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You hear everywhere how the housing market has a shortage of houses for sale and huge buyer demand. For someone getting into house hacking, the search can prove even more difficult. Just finding a two-, three, or four-flat building to house hack can prove super difficult. When you do find something, affordability becomes a factor because, real talk, Chicagoland has a pretty high cost of living. You may find yourself wondering how should I finance my Chicago house hack?
Which Mortgage Structures Are Available?
Purchasing as property where you also intend to live (owner-occupied) opens different options than buying purely investment property. Anyone purchasing either type of investment property can apply for conventional or Federal Housing Administration (FHA) loans.
Conventional Loans
Conventional loans require higher down payments and higher cash reserves. Most lenders will require 15-20% down payments for investment property and six months or more worth of cash reserves. Serial investors may have noticed an uptick in required months’ reserve thanks to increased risk associated with pandemic eviction moratorium.
FHA Loans
Although the Federal Housing Administration doesn’t actually lend money, they insure the bank and mortgage brokers who do. FHA loans come with lower down payment requirements averaging 3.5-5%, and lower FICO credit score requirements. You also have access to better interest rates and overall lower expenses to close. While possible to be approved for an FHA loan as an investor, you have wider access as an owner-occupier applicant. But you have to prove residency in one of the flats
How Do I Know If I Pass the Self-Sufficiency Test?
Apart from showing the usual debt-to-income ratios, those in the Chicago area have to pass an additional self-sufficiency test. The test only applies to FHA loans to purchase a three- or four-flat building. It involves a little research and some basic math.
If the current owner has tenants, you take the lower of their current rent rates vs. comparable market rates. Add up the rents for all the rentable flats (i.e., NOT yours) for total income. To pass the test, 75 percent of that rental income must exceed the amount of your mortgage on the building.
An important caveat: only FHA-certified appraisers can value the rental property at market rates and expected going rate rents. Only the appraiser valuations will be considered valid results for the self-sufficiency test.
Finding the Right Realtor
Whether buying your own residence, a house hack or an investment property, having the right agent makes all the difference. To find a good one, call a few agents in your area and strike up a conversation. Explain what you want and ask their advice. Some real estate agents just have a knack for knowing which buildings will make the best house hacking buys. They can also recommend FHA-certified appraisers to value the rental property at market rates and expected going rate rents.
There’s a lot to unpack and you can easily get overwhelmed. But don’t give up! Sometimes, it helps to have a resource you can go to when you need more information. GC Realty can help with recommendations on potential real estate agents and overall lending guidance. Feel free to contact us, even if you just want to chat.
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