The Hidden Hurdles of House Hacking: Navigating Boarder Income Guidelines for Investors

By Douglas Katz – 08/22/23

House hacking, a strategy where real estate investors derive income from a property that they also occupy live to cover their expenses, has gained popularity in recent years.  I will be honest, I hate the terms.  I get the need to provide a hip and trendy description to get people excited, but I feel that the term can be misleading, as it oversimplifies the intricacies involved in executing this strategy successfully. I rarely if ever see sources address the use of boarder income to qualify for loans and the difficulty in doing so.  I see a lot of prospective investors take the information that they find online about house hacking only to be surprised when they find out it is not simple to execute.  I hope to shed some light light on the impact of guidelines prohibiting the use of boarder income on investors plans and strategies as well as some ways that it does work.

OG House Hacking

House hacking, in essence, is not a new concept. it has been around since people needed a way to augment their income to cover expenses on a real estate property.  In the past, it was known as having boarders or operating boarding houses. This practice involved renting out rooms to generate income, much like the modern-day approach to house hacking. The movie “Forrest Gump” even provides a glimpse into this historical reality. Recognizing this connection highlights the longevity of the strategy and its evolution over time, but it also means that lenders know about it, understand it and structure programs to use or not allow it based on these considerations.

The Misleading Term and Funding Challenges

As I said, I hate the terminology and classification that has emerged around boarder income.  While the term “house hacking” sounds appealing and trendy, it often lacks comprehensive explanations of the financial challenges that come with it and seems to communicate that you’re smarter than the system. Many investors are attracted to the idea of using rental income from boarders to qualify for loans, but this is where the first hurdle arises. Most conventional lenders have strict guidelines regarding the use of boarder income for loan qualification.  Fannie Mae, for example, is very clear on what is allowed in their guidelines and it is a very narrow box. While investors can still generate income from renting out rooms, they can’t always rely on this income to secure loans, except for specific programs that permit it.

Understanding Loan Limitations

Investors need to be aware of the limitations imposed by conventional lenders on using boarder income to qualify for loans. While it’s possible to receive rental income from boarders, this income generally can’t be counted as part of the borrower’s qualifying income. This doesn’t mean the income is unusable—it can still contribute to the investor’s overall financial well-being. However, it’s important to approach funding with a clear understanding of these limitations to avoid disappointment and setbacks.

The Exceptions and Non-Conventional Options

Certain loan programs do allow the use of boarder income for qualification, but they are exceptions rather than the rule. Investors must research and identify these programs to ensure they align with their house hacking plans. Furthermore, non-conventional loan options might permit the use of boarder income for qualification, but they often come with their own set of restrictions and requirements.

While this is always subject to change, there are some conventional programs such as HomeReady for Fannie Mae and Home Possible for Freddie Mac that allow boarder income, but they also come with limitations on income or specific zip codes to qualify.  So, as you can see, the presence of a program does not mean that anyone can use it regardless of their financial picture.  Additionally, the property must fall within the loan limits for the different agencies.

Some investors have asked me about non-conventional programs specifically for investment when they realize the limitations of the conventional programs.  While these are super flexible in a lot of ways, they definitively prohibit any owner-occupied properties.  The borrower actually signs an affidavit in most cases that they will not occupy the property and they can face penalties if they occupy the property.

Differentiating House Hacking from Owner Occupancy

I also want to address another scenario that I see referred to as house hacking.  Confusion sometimes arises when people label buying a multi-unit property and living in one unit as house hacking. This is nothing new, special or innovative.  I have been doing deals liken this since getting into this industry in the early 2000’s and I was surely not the first to do it.  In reality, this is more about owner occupancy with the intent to generate rental income. Conventional lenders generally accept this approach, as it doesn’t hinge on using boarder income for loan qualification. Like boarder income, however, it is not always a simple calculation and use of the income can depend on the program and the borrowers experience.

Avoid Labels and Focus on Objectives

House hacking is a strategy that offers investors the potential to generate income and build wealth through real estate. However, the terminology can oversimplify the challenges and limitations that come with it, particularly concerning the use of boarder income for loan qualification. Investors need to be diligent in researching loan guidelines, exploring exceptions, and understanding the distinction between true house hacking and owner occupancy. By doing so, they can navigate these hurdles and make informed decisions to achieve their investment goals.

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