Financing a House Hack For Success

Introduction

When I was first starting to look at properties at the age of 24, I was unaware of the amount of financing tools and promotions that many homebuyers may be entitled to. I assumed that 20% down and paying closing costs was the only path to buying a house. This couldn’t be further than the truth. In this article, I want to break down the different types of loan options that may be suitable for you.

To get started, I’d like to refresh us on the idea of house hacking. House hacking involves buying and owner occupying a part of a property while also generating rental income from another part of the property. This can be done by renting out an ADU (accessory dwelling unit, or in-law apartment), extra bedrooms, or another complete unit. House hacking allowed me to do a few things differently from the average person when I was starting out.

• I was able to reduce my living costs because the rental income was offsetting my mortgage.
• I was able to afford a more expensive property that had greater potential long term.
• I gained first hand experience as a landlord while on the premises.
• The tenants helped me put more equity into an asset that has been appreciating in value since purchasing it in 2018.

Like many others, I did not have 20% saved for a down payment at the time of purchasing my first house hack. Upon investigating loan types, networking with other investors, talking to various lenders, and meeting certain criteria, I was enlightened to the fact that I had more options than I could have imagined. I want to highlight and review some of the key loan types and financing options that can help finance a house hack purchase today.

1. Why Financing Matters in House Hacking

• Leverage: controlling a property with a small down payment.
• Cash flow vs. financing terms.
• Impact of interest rates, loan type, and down payment on returns.

Financing is a key component to a proper house hack. With any house hack, we are creating leverage by taking on a larger mortgage balance that is offset with supplemental rental income. When buying a regular owner occupied house, a low down payment such as 10% or below might be challenging to afford since the PMI and loan balance are significant. However, if we are factoring in some rental income, the numbers can start to work out in our favor.

One advantage to house hacking is that an owner occupied mortgage product can be used. The benefit here is that owner occupied loans have easier terms to work with, such as:

• Lower down payments required
• Lower credit scores required
• Better interest rates
• Access to special loan programs like FHA, VA, and 203k loans

Now you may be asking what the difference is between an owner occupied loan and another type. When buying a property that you will not reside in for at least one year, the purchase is considered either an investment property or a second home.

With investment properties, the assumption is you will not be living there for any amount of time. The property usage is to be rented out to tenants. Investment properties require 20% or 25% as a down payment in most cases. This is because the bank wants to make sure there is enough equity in the property to account for issues that may arise with managing tenants, loss of rental income, property damage etc.

A second home is different than an investment property. This type of property must be a single-unit, year-round habitable dwelling that is owner occupied for part of the year which means it cannot be rented out full-time. Government-backed loans like FHA or VA loans are not permitted for second homes.

2. FHA Loans (3.5% Down)

FHA loans are one of the best tools to use for a house hack but individuals need to understand the pros and cons in order to be successful. This loan allows for significant leverage since buyers only need 3.5% of the home value for the down payment. FHA loans are the most forgiving of the loan types because an applicants credit score can be as low as 580 to qualify. Despite this low barrier to entry, there are stipulations that come with using an FHA loan.

One drawback is that FHA loans must carry mortgage insurance for the entire life off the loan. Buyers can not remove PMI once the loan to value ration drops below 80%. The only way to remove PMI is to refinance the loan to a conventional one after a couple years but this can be tough if rates are higher than at the time of home purchase.

Another condition for FHA loans is that individuals can only have one FHA loan in their name at a time unless the next property is over 100 miles from the first property. Buyers would need to refinance out of an FHA loan to free up the usage of another one.

An FHA loan can be used to finance a one to four unit residential property. For a three or four family, there is a self sufficiency metric that the home must meet in order to use an FHA loan. For a three-family property, the rental income from two of the units must cover the entire mortgage. The rental income from three of the units must cover the entire mortgage when analyzing a four-family home.

3. Conventional Loans (3–5% Down for Owner-Occupied)

House hacking isn’t just for FHA buyers, you can absolutely do it with a conventional loan, and in some cases it’s the smarter move. Conventional loans often come with fewer restrictions, no upfront mortgage insurance, and more flexibility once you build equity.

I used a conventional loan for my first single family house hack.

Down Payment Requirements by Property Type

• Single-Family Home (including one with roommates or an ADU): You can put as little as 3–5% down if you plan to live in the property as your primary residence. Some lenders offer 3% down “HomeReady” or “Home Possible” programs if you meet income limits or first-time buyer criteria.
• Two-Family (Duplex) up to a Four-Family (Quadplex): The minimum down payment is 5% for a conventional loan backed by Fannie Mae. This loan requirement changed in 2023, when up until then, 15% down was required. You’ll also need to show that you’ll live in one unit as it still counts as an owner-occupied loan. There is still PMI required for conventional loans that are using less than 20% down but this differs from an FHA loan because the PMI can be cancelled once 20% equity is surpassed.

Why Use a Conventional Loan for a House Hack?

• You can avoid FHA’s mortgage insurance that sticks for the life of the loan.
• You’ll have an easier time refinancing or moving out later without running into occupancy issues.
• The property can appreciate as a residential asset (1–4 units are still considered residential for conventional lending).

4. VA Loans (0% Down for Veterans/Military)

If you’ve served in the military, you have one of the best tools out there for house hacking, the VA loan. It’s designed to help veterans and active-duty service members buy a primary residence with zero down payment and no private mortgage insurance (PMI). But what many people don’t realize is:

You can use it to buy up to a four-unit property and rent out the other units while living in one.

Here’s how the down payment and requirements break down by property type:

Down Payment Requirements by Property Type

• Single-Family Home: 0% down for qualified borrowers. You can rent out extra rooms or even an ADU on the property, as long as you occupy the main home as your primary residence.
• Two-Family (Duplex): 0% down still applies! The VA allows 2–4 unit properties as long as you live in one unit. You’ll just need to show that the rental income from the other unit is realistic and sustainable.
• Three-Family (Triplex): 0% down is still possible, but the lender may require you to have stronger credit and cash reserves (typically 6 months of mortgage payments). You may also need an appraisal with an income analysis (VA Form 26-8994) to prove the property cash flows.
• Four-Family (Fourplex): 0% down still applies if you qualify, but the income requirements and reserves get stricter. The VA wants to be sure you can handle vacancies or repairs. Pro tip: A fourplex is the maximum size you can buy under a residential VA loan.

Why House Hack with a VA Loan?

• No down payment means you can start investing with minimal cash out of pocket.
• No PMI keeps your monthly payment lower than FHA or conventional loans.
• You can use rental income from the other units to help you qualify for the loan.
• After living there for a year, you can move out and rent your own unit — then repeat the process with another VA loan (if you have remaining entitlement).

5. USDA Loans (0% Down in Rural Areas)

If you’re looking to start your house hacking journey in a rural or suburban area, the USDA loan might be your secret weapon. Backed by the U.S. Department of Agriculture, this program helps buyers purchase homes in eligible areas with 0% down, and unlike most people think, “rural” doesn’t always mean farmland. Many small towns and outer suburbs qualify.

But when it comes to multi-unit properties, USDA loans are a bit more limited than FHA or VA. Let’s break it down.

Down Payment & Property Type Requirements

• Single-Family Home: 0% down if the property is in a USDA-eligible area and you meet the income limits. You can rent out extra bedrooms, a basement, or even a detached ADU — as long as you live in the home as your primary residence.
• Two-Family, Three-Family, or Four-Family Homes: Not allowed under the USDA program. The property must be a single-family dwelling, meaning you can’t use USDA financing for a duplex, triplex, or fourplex.

Why Use a USDA Loan for a House Hack?

Even with the single-family restriction, a USDA loan can still be a powerful house hacking tool if you:

• Buy a larger single-family home and rent out rooms to reduce your living costs.
• Add a legal accessory dwelling unit (ADU) to bring in rental income.
• Purchase a home with a finished basement or in-law suite that can be rented out long-term or mid-term (like to traveling nurses or local workers).

Requirements

• The property must be in a USDA-eligible area (you can check online with your address).
• You must meet household income limits based on your county and family size.
• You’ll need to occupy the home as your primary residence.

6. Portfolio and Local Bank Loans

It’s always good to shop around for mortgage financing just like its a good idea to shop insurance rates and other services. Prospective buyers may find that local, smaller banks and credit unions may offer more flexible options as they are trying to win more business.

Portfolio lenders will sometimes keep loans in-house and offer looser underwriting measures. These lenders may not have as stringent terms and could possibly offer better interest rates and mortgage insurance rates.

Some property types might look like awesome deals on paper and have significant opportunity to be a slam dunk but traditional financing may not work for them. A private lender may help with these types of creative financing as well as offer down payment terms between 10% and 20%.

7. Seller Financing

There are some situations where going through a lender or bank may not be the best option to finance a house hack. Rather than using a bank, the seller can act as the bank where payments are made directly to them. This option is called seller financing and it can be preferred if the following applies to the deal:

• The seller owns the property free and clear. They are not making monthly mortgage payments on the house.
• The seller may like the consistency of monthly payments that include interest made to them to buy the property.
• The seller might be trying to avoid a hefty tax bill, so rather than selling the property outright, they can take the proceeds over time.

The benefits to seller financing include being able to negotiate the down payment, interest rate, balloon payments, and the length of the term. This can also help a buyer that otherwise would not be able to get standard bank financing for the property.

8. HELOCs, Home Equity Loans, and Cash Out Refinancing

For those who are looking to move on to their second or third house hack, it may be possible to tap into the equity from the first property. This can be done with a HELOC (home equity line of credit) or a cash out refinance.

When a HELOC is opened up on a current residence, it allows the use of the home’s equity for anything, which offers great flexibility. Its common for the lender to require a 20% equity stake remain in the property. This means that if the home is at a 70% loan to value ratio, only 10% of that home value could be borrowed with a HELOC. I’ve seen some credit unions go up to 90% or 95% LTV but buyers will need to check with lenders to see what can be done.

Most HELOC’s have a 10 year “draw” period followed by a 20 year “payback period” during the draw period, you can withdraw cash up to the defined amount for which the HELOC was opened. Only interest payments are required during the draw period until year 10, when the principal plus interest needs to be paid back via monthly installments.

A cash out refinance is another tool available that allows for the refinance of the current property to pull out funds for the down payment of the next property. Similar to the HELOC, 20% of the equity must remain in the first property after refinancing. A cash out refinance can work well if the interest rate on the first mortgage is reduced but if the refinance would incur an interest rate that is much higher than the current rate, the juice may not be worth the squeeze.

9. House Hacking with Partners or Co-Buyers

House hacking doesn’t have to be a solo move. In fact, teaming up with a partner, friend, or family member can make it easier to break into real estate — especially with today’s higher prices and interest rates.

By co-buying a property, you can split the down payment, qualify for a larger mortgage, and share the workload of managing tenants. But before you jump in, it’s important to understand how to set it up the right way.

Why House Hack with a Partner?

• Lower upfront costs: Splitting the down payment and closing costs means both of you can invest with less cash.
• Higher buying power: Two incomes can qualify for a larger property — maybe even a duplex or triplex instead of a single-family.
• Shared responsibility: You can divide tasks like maintenance, bookkeeping, and tenant management.

Ownership Structure

When you buy real estate with someone else, you’ll usually choose one of two forms of ownership:

• Joint Tenancy: Equal ownership shares, with rights of survivorship. If one person passes away, their share automatically transfers to the other owner.
• Tenants in Common (TIC): Each person owns a defined share (which can be unequal). This is often better for investment purposes, since it allows flexibility if one person wants to sell later.

Must do: Always put everything in writing such as how you’ll handle expenses, income, repairs, and what happens if someone wants out. A simple co-ownership agreement can prevent big problems down the road.

Loan Considerations

All co-buyers listed on the mortgage are jointly responsible for repayment. That means your credit scores, income, and debt all factor into the loan approval.

If one person plans to live in the property, you may still qualify for owner-occupied financing even if the other partner doesn’t move in.

Smart Ways to Structure the Hack

• Live-in partner setup: One person lives on-site, the other is a silent investor.
• Roommate-style: You each live in a unit or bedroom and rent out the others.
• Joint investment: You both buy and manage the property as an income-producing asset.

11. Tips for Getting Approved

• Credit score optimization.
• Reducing debt-to-income ratio.
• Getting pre-approved before searching.
• Building relationships with lenders who understand house hack

When I was looking for my first house hack in 2018, I was pre-approved with a lender who was more traditional and conservative with approaches to my mortgage. This lender was not very familiar with house hacking and mainly worked with clients who were either buying houses as their primary residence or for investment purposes. There was no overlap in the middle with house hacking.

I did find this individual to be very helpful in helping to reduce my PMI, get the best interest rate, understand the tax programs in my area, and reduce my closing costs as much as possible but, there wasn’t a strong focus on the leverage options available to me when expressing my interest in a multi-family that I would reside in.

Because of this, I recommend speaking to many lenders and discussing your goals to see how they can help. If it doesn’t seem like one can help you get moving with a house hack, try speaking to others until you find the right person to work with.

12. Common Mistakes to Avoid

• Over-leveraging. Make sure to run all of the costs and figures before using a lot of leverage in a house hack. If the costs to operate are too high, you overpaid for the deal, or you take on poor tenants and don’t manage it well, you can become overwhelmed.
• Ignoring mortgage insurance costs. Its important to factor in all PMI costs and understand how it affects cash flow.
• Forgetting about reserves and repair budgets. It is imperative to keep cash reserves and maintain a budget for capital expenditures and surprise situations.
• Assuming one loan type fits all. Each loan is specific to a certain area, individual, financial picture and much more. I cannot suggest which loan type is best for you but I want to provide the knowledge to enable others to make a proper decision on their own.

Conclusion

In closing, lets remember that multiple financing paths exist. No perfect deal and financing method is going to just fall into your lap one day. I need to think strategically and analyze each and every property to make a proper decision. The best way to learn more about financing methods is to talk to more RE professionals and lenders from all sorts of backgrounds and experience. Lastly, I tell everyone not to let a financing hurdle stop you from house hacking. There is always a way to get it done and the challenges to set yourself apart from others are always worth it, especially in the long run.