The Scene: Amber goes to visit a loan officer at the local bank to learn about her options to buy a multi-unit residence.
Wednesdays were my shortest days at school, so I booked an appointment after work with a mortgage agent at my bank. I’m sure Dylan would’ve been willing to come with me, but I decided to do this step alone. He didn’t even know I was going. I told myself that I kept it a secret to surprise him later, but deep down, I knew I wanted to verify his claims.
The loan agent, Gregory, entered data into his computer for a full five minutes before leaning back in his chair. “Based on your current income and credit score, I should be able to pre-qualify you for an FHA loan of up to $125,000.”
I scowled. Just when I was starting to think Dylan wasn’t full of crap.
“Miss, there’s no reason to get upset. Many people come in here and hope to be pre-qualified for higher amounts, but I have to tell you that $125,000 is not so bad. There are plenty of properties in town that go for even less.”
I sank into my chair. “Well, my boyfriend seemed to think I’d be able to afford more than that.”
Gregory held his hands together on his desk, all proper-like. “Look, the Federal Housing Authority program is remarkable. Through it, the government greatly reduces the down payment you need to purchase a primary residence. But even though you can buy a home with as little as 3.5% down, you still need enough income to make the monthly mortgage payments. It’s all a question of risk.” Then he gave me that kind of pedantic grin I offered the kid in my class who thought it’d be a good idea to bring his pet snake to school. “We’re not going to loan you the money to buy yourself a mansion and then sweat each month over whether we’re going to get our payment.”
“That makes sense.” I swallowed my pride. “I’d just been led to believe I could get more, that’s all.”
“How much did you hope to borrow?”
I squinted my eyes, embarrassed to even say it. “Enough to buy four apartments?”
“Four?” A wide grin grew over the mortgage agent’s face.
“Pretty funny, eh? My boyfriend called it a house hack.”
“Ah, you should have mentioned.” Gregory swiveled back to the computer and punched in a few numbers. “That changes our calculation, doesn’t it?”
“It does?” I shot up.
“I’ll have to see the exact rental values on whatever property you find to give you a final number.” He faced me again. “But if that’s your plan, I ought to be able to lend you $300,000 or more.”
“Wait.” My jaw literally fell. “What?”
“It’s very simple, Miss.”
Miss? Was he getting pedantic again? “Call me Amber.”
He nodded and continued. “As I said, getting a mortgage is all about risk.”
“But why should buying four units change the equation?”
“Because, unless I misunderstand your plans, three of those units will be income-producing. The more income you make, the more you can pay back, so the more we’ll lend.”
Part of me was excited at the prospect of such a big loan, but another part growled. Why did Dylan have to be right all the time? “I thought this FHA thingy was just for primary residences?”
“Precisely, so we won’t be able to lend you enough money to buy apartments in four different buildings. But the government allows for one property to have up to four living units and still be considered your primary residence.”
My head tilted in confusion. “But how can it be both a primary residence and income-producing?”
Gregory shook his head. “That’s what we call a legal fiction.”
“Legal fiction?”
“Yes, that’s when the law defines something to be different than we all know it to be. The most famous is a corporation, which the law treats as a person, even though it’s not. In your case, Miss, the law allows us to consider a building of up to four units as a primary residence, even though we all see it for what it is, a legitimate commercial income source.”
“That’s idiotic.”
“I don’t make the policies, Miss.”
“Maybe not, but the government doesn’t force your bank to write these mortgages, does it?”
“No, but we’re in the business of lending money. The more we can safely lend out, the happier we are. As I said, it’s all about the risk. If the government is willing to absorb more risk on a property of up to four units, we’re happy to let them do so. There’s a strong rental market in town. Based on the numbers I see before me, I’d say that having three decent sized rental units could more than double your income.”
“But I’ll also be paying a lot in interest, won’t I?”
“Yes, especially in the beginning. But much of that is tax-deductible.”
This was getting complicated. “So how am I supposed to know if I’m even making money?”
“I’m not an expert in real estate accounting, but I’m happy to connect you with a specialist in this area if you’d like to know more.”
“Sounds like you guys are all in cahoots.”
“We are. There are too many moving parts for any of us to go it alone, so real estate folk network like crazy.”
“In that case, I should introduce you to my boyfriend, Dylan.”
Gregory slapped the desk, and his face lit up. “Dylan’s your boyfriend?”
I leaned in. “You know him?”
“We belong to the same real estate club. No wonder you’re looking to house hack. That’s his favorite tactic. I’ve written him three mortgages over the years.”
“All for house hacks?”
“Yes.”
“I thought the house hack only works if it’s your primary residence?”
“It does.” Gregory’s whole energy had changed. He now leaned back and laughed. I half expected him to light up a cigar. “Still, that doesn’t mean we force you to stay there for life.”
“But Dylan said that the terms are better on a primary mortgage loan than on a commercial one.”
“That’s true. For instance, if you wanted to buy a five-unit building rather than four, we could no longer consider it a primary residence. Not only would you pay a higher interest rate, but you’d need a downpayment of at least 25% that we expect for commercial loans rather than the 3.5% we’re discussing today.”
“But once he moves out, the property becomes commercial, doesn’t it?”
“We don’t renegotiate just because your circumstances change. Once a mortgage is written for a primary residence, it stays that way for the duration of the loan, which can be up to 30 years.”
“You can have multiple homes on primary mortgage loans?”
“Indeed. I have clients who come in for a new one every year. Dylan himself has mortgages through us for three homes and a total of 11 units.”
“You wrote him mortgages on 11 units, all classified as his primary residence, even though he can only live in one?”
“You got it, Amber.”
What happened to Miss? “You have no problem with this?”
“Why should I? The numbers for each mortgage worked out. All Dylan’s properties cash flow. The risk was minimal.”
“What do you mean they cash flow?”
“Cash flow is the amount of money left in your pocket after paying all your expenses. So not only are Dylan’s apartments paying themselves back, they also put money into his pocket each month.” Gregory’s grin disappeared as he caught my eye. “Is something bothering you?”
I crossed my arms. “It just seems so unfair.”
“What’s unfair, Amber?”
“That you’ve got all these loopholes. Why should Dylan own 11 primary residences, when most people can’t afford even one? Isn’t this just another example of how the rich get richer?”
“Not this time. I’ll give you that it’s a loophole, but primary residence policies, and especially the Federal Housing Authority program, don’t exist for the rich. The amount you can borrow under the FHA program is capped, so you can’t buy mansions with it, and you have to live there, so the rich can’t just use it for investments alone. Besides, the real benefit of the FHA program wouldn’t help them anyway.”
“What’s that?”
“The ability for those who don’t have standard down payment money to buy a home with almost no money down. The flip side of doing this is that the government requires mortgage insurance for such loans, which is an extra expense. The rich can put down a larger downpayment and spare themselves this cost. Sorry to burst your rich-get-richer bubble, but this particular loophole exists solely for the poor and working class. Like Dylan.” Gregory lifted his eyebrows. “You don’t consider him rich, do you?”
“Dylan?” I couldn’t help but giggle. “Who doesn’t own a car and won’t even go out to eat? No, I don’t think of him as rich.”
“There you go. In my experience, there are financial regulations that benefit the rich and others that benefit the poor. The only ones that consistently lose out are the ignorant. In this case, the law benefits the poor. That’s fortunate for you, for based on the numbers I see, you’re anything but rich yourself, so there’s no reason you can’t use this program to buy yourself a nice home and a significant source of side income at the same time.”
“Can I go out and buy four apartments with $300,000?”
“Oh, yes. It might not be in the exact location you want,” he leaned back in his chair again, “and it might need some work, but there are quite a few properties available at that price.”
“Come on, Gregory. If it needs work, I’m right back where I started. I need my money for the downpayment and closing costs.”
“The FHA program allows you up to a 6% seller assist, meaning that the seller can absorb closing costs of up to 6% of the property’s value. So with the right seller, you can avoid most or all of those fees.”
“That’s still not going to free up enough cash to renovate four apartments.”
“No, but if you can come up with 3.5% of the money for the rehab, we can finance the rest and add it into your mortgage.”
My jaw went slack again. “You’re kidding.”
“No, Amber. It’s called a 203(k) loan. It’s a subset of the FHA program.”
“And I can use the 203(k) money to fix up all four apartments?”
“Yep. As we said, all four are still classified as your primary residence.”
I shook my head. “Unbelievable.”
“I think we’ve covered all we need for now. Your next step is to find a property. When you do, come back, and I’ll be happy to arrange financing.”