House Hacking or Mortgage Fraud?

House hacking.  A term, if you’re interested in getting into property investment, you’ve probably  heard or read about. If you haven’t heard of “house hacking”, you may have heard of mortgage fraud. These are not the same things, oh no, but if you don’t know what house hacking is, and you try to do it, you might just be committing mortgage fraud. Let’s talk about shall we?  Shouldn’t take long.
Are you a Biggerpockets fan like me? House Hacking is a term that Brandon Turner, the host of the podcast, coined that refers to, essentially a “hack” for getting into investment properties. It’s a super effective method that has actually been around far longer than Brandon, and I want to talk about it today, briefly.  Because there’s something that’s been brought to my attention by one of my lenders… and that is that loose interpretation of the idea, if it’s not fully understood, can lead to something you wouldn’t call “house hacking” at all. Unless of course you intend to make it a more traditional hacking of the system and be put in jail for mortgage fraud.  Until she brought it up, I didn’t realize people may not know the difference.
So let’s make one thing clear right now. If you get a loan for a home that will be considered your primary residence, and you don’t live there as you would a “primary residence” then you may be committing mortgage fraud. It’s a breach of the terms of the agreement you made with the lender. You told them you were going to live there, and you decided instead to live somewhere else. Now, to clarify further, there is a timeframe attached to this term – usually with an FHA loan you need to live in the house for a year as a primary resident, or maybe you need to live there long enough to make up 20% equity in the home if you didn’t put 20% down – I’m not a lender, I’m not going to define the terms here of a hypothetical agreement. But I do know that you could flip it into a conventional product after that – but let’s not get deep in the weeds here.
The point is, this whole “house hacking” idea is totally dependent on how you finance.  So let’s further define what “house hacking” is.
This is such a popular idea that Forbes actually has defined it so I’m just going to read their interpretation. “Simply put, House Hacking is a strategy that involves renting out portions of your primary residence to generate income that is used to offset the cost of your mortgage and other expenses associated with owning a home. When done correctly, it allows people to live in expensive areas completely for free, or even generate positive income through home ownership.”
Basically it means two things, and I think this is where the intentions need to be made clear… first off, you can buy a house and have the mortgage paid by renting out the rooms in the house.  That’s awesome, and that’s what it’s really for.  But it also allows a buyer to get more house than they may have been able to afford if they were to rely exclusively on their own income to pay for it. The catch is, you still have to qualify for the house, so it has to meet your debt to income ratio, credit score and all that. You can get a cosigner if you need, obviously. But to keep it kosher, you have to follow the terms of that lending.
What I’m seeing is that complications arise when a person works in two places, and wants to buy a primary residence in one, and possibly rent somewhere else once that mortgage is paid for by a renter at the “primary” residence they bought. Or maybe a buyer wants to fen-angle short term rentals out of this new investment property of theirs. Both of those things can in theory be done, but it’s a hard round peg to fit in a very specifically shaped hole. And most buyers that need to use the “house hacking” method to get into an investment property, or property in general, probably – unfortunately – won’t fit either of those scenarios. It’s a rare bird.
So, in closing, I hope that you will heed the wisdom of the age old entrepreneurial way of buying a house that has been recently coined, “house hacking” if it’ll work for you. But, just be careful and don’t overcomplicate the rules of the game. It’s just easy to do wrong, as it is to do it right.
Good luck out there folks! Till next time.