Live In Your Own Rental Building And Call It A Primary Residence

Gina Pogol
Gina PogolThe Mortgage Reports Contributor

You Can Live In Your Rental Building

Did you know that you can actually live in your real estate investment property?

Owning a rental property and living in it can be an excellent way to reduce your monthly mortgage payment outlay, while building home equity for your future.

And, you can even do it as a first-time home buyer, if you plan ahead. The key is to purchase a home with 2-units, 3-units, or 4-units — none more, and none less.

Homes with 2-4 units can be financed as residential mortgages, which means you get access to “regular” mortgage rates; and properties can be purchased no matter when you’re currently renting a home or owning one.

You’ll also get access to larger loan sizes because loan limits for multi-unit homes are higher than for 1-unit properties.

In Seattle, Washington, the maximum loan size for a single-family home is $540,500. But, if you were to buy a 4-unit home with plans to live in one of the units, you could borrow as much as $1,039,450 instead.

Here’s what you need to you about buying a “combined” rental property / primary residence.

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Rent Your Home And Call It “Primary Residence”

When you purchase a 2-unit, 3-unit, or 4-unit home, it’s your right as homeowner to live in any of the home’s available units.

For many homeowners, living in a multi-unit rental building is a way to defray, reduce, or eliminate the monthly cash outlay to their lender. Rents collected from the home’s other units offset the payment due on the primary one.

Owning and living in a rental building is allowed by mortgage lenders and, according to mortgage lending guidelines, when you live in a building you rent out, the entire property can be classified as your primary residence, which gives access to lower mortgage rates and potentially larger monthly profits.

In addition, renting out a building in which you live grants you access to a wider range of mortgage products.

When you live in a 2-4 unit building and rent the remaining apartments, you have access to loans via the FHA, via the Department of Veterans Affairs (VA), and via Fannie Mae and Freddie Mac, including the low-downpayment HomeReady™ mortgage.

However, qualifying for primary residence rental building loan will vary.

Collecting Rental Income On A Primary Residence

Purchasing a multi-unit rental property to use as your primary residence has its benefits, both in terms of short-term, cash-flow profits; and, long-term gains of equity.

However, depending on the mortgage you use to finance it, qualifying for such a loan will vary.

In general, mortgage lenders allow just 75% of a home’s total rental income to be claimed on a mortgage application because rental homes go sometimes vacant. This mean that for every thousand dollars in rent collected, $750 can be used on your loan application.

After that, mortgage guidelines diverge and, because of these difference, you may find that you qualify for an FHA loan but not a Fannie Mae loan; or, for a Fannie Mae but not a VA loan.

A Fannie Mae lender, for example, will subtract rents collected from your proposed monthly payment and use that figure as part of your debt-to-income (DTI) ratio.

By contrast, to find your DTI, a VA lender will add the rents collected to your total monthly income, and leave your proposed monthly payment unchanged.

These two approaches are drastically different and, because of how DTI is calculated in each scenario, it becomes a lot easier to get approved to live in a rental property when you’re using a conventional mortgage via Fannie Mae as compared to a VA loan via an approved VA lender.

Both options are worth considering, though, because VA mortgage rates can be lower than conventional rates by as much as 37.5 (0.375%) basis points, which can increase the profitability of your rental.

Verify your new rate (Oct 15th, 2018)

Downpayment Requirements For Primary Residence Rental Properties

The mortgage approval process when you buy a rental property as a primary residence is similar to when you buy any other home.

Your lender will require proof of income and assets; evidence of employment; and, a credit score which meets program minimums.

Making a down payment is also required (unless you’re using the VA mortgage, which allows for 100% financing)

Here are the minimum downpayment requirements for some of the mortgage programs you may want to use to finance your primary residence / rental home:

  • VA loan: No downpayment requirement, no mortgage insurance required.
  • FHA loan: 3.5% downpayment required. Credit score minimum of 580.
  • Freddie Mac Home Possible: 5% downpayment required. Must meet income standards.
  • Conventional loan; 15% downpayment for 2-unit; 25% for 3-4-unit

Note that the VA and FHA offer various programs to buyers of homes including the Energy-Efficient Mortgage and the 203k construction loan, respectively.

Both can be used in conjunction with your “standard” loan product.

What Are Today’s Mortgage Rates?

Buying a rental property as a primary residence can help you build your real estate portfolio faster and more efficiently than purchasing properties one-by-one.

Get today’s live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.

Verify your new rate (Oct 15th, 2018)