You found a duplex listed at $385,000. You have $25,000 saved. The math says you need $77,000 for a 20% down payment, and you're wondering if house hacking is even possible for you right now.
It is. Conventional loans allow as little as 5% down on owner-occupied 2-4 unit properties, and some programs go even lower.
The Down Payment Reality for 2-4 Unit Properties
Most people assume you need 20% down for investment properties, and they're right, for non-owner-occupied properties. But when you're living in one of the units, lenders treat the property differently. You're a homeowner who happens to have rental income, not an investor.
Here's what conventional lenders actually require for owner-occupied multi-unit properties:
| Property Type | Minimum Down Payment | Notes |
|---|---|---|
| Single-family | 3% | Primary residence |
| Duplex (2 units) | 5% | Must occupy one unit |
| Triplex (3 units) | 5% | Must occupy one unit |
| Fourplex (4 units) | 5% | Must occupy one unit |
That $385,000 duplex? You'd need $19,250 down with a 5% conventional loan. You have $25,000. This changes the entire conversation.
Three Conventional Loan Options for House Hackers
Standard Conventional (5% Down)
This is the most straightforward path. Any conforming conventional loan from Fannie Mae or Freddie Mac allows 5% down on 2-4 unit owner-occupied properties. You'll need:
The catch: you'll pay private mortgage insurance (PMI) until you reach 20% equity. I'll break down the PMI math in a minute.
HomeReady (3% Down for Single-Family, 5% for Multi)
[Fannie Mae's HomeReady program](https://singlefamily.fanniemae.com/originating-underwriting/mortgage-products/homeready-mortgage) targets buyers with income at or below 80% of the area median income. For multi-unit properties, you still need 5% down, but the program offers reduced PMI rates and allows rental income from the other units to help you qualify.
The income limits vary by location. In expensive metros, 80% of AMI might still be $90,000 or more. Check the lookup tool on Fannie Mae's site before assuming you won't qualify.
Home Possible (3% Down for Single-Family, 5% for Multi)
Freddie Mac's equivalent program works similarly. Same income limits, same reduced PMI, same ability to use projected rental income for qualification. The differences between HomeReady and Home Possible are minor. Whichever one your lender offers is probably fine.
Understanding the PMI Trade-Off
With 5% down, you'll pay PMI. This isn't optional, and it isn't cheap. But it's also not a reason to wait years while you save for 20%.
PMI on a $365,750 loan (95% of $385,000) typically runs between 0.5% and 1.5% of the loan amount annually, depending on your credit score and the specific property. Let's use 0.8% as a realistic middle estimate:
> Annual PMI: $365,750 × 0.008 = $2,926 > Monthly PMI: $244
That $244/month feels painful. But consider the alternative: waiting 3-4 years to save another $55,000 for a 20% down payment. During that time, property prices in your market might increase 15-20%. That $385,000 duplex becomes a $450,000 duplex, and you're still chasing the down payment.
PMI also cancels automatically once you reach 78% loan-to-value, or you can request cancellation at 80%. If your property appreciates or you pay down principal aggressively, you might eliminate PMI in 3-5 years.
The Numbers That Actually Matter
Let me run through a complete example with realistic figures.
Property details:
Loan structure (5% down conventional):
Total monthly payment: $3,176
Income analysis:
If you rented a similar 2BR apartment in the same area, you'd likely pay $1,300-1,500/month. So yes, you're paying slightly more than renting. But you're also:
The year-one cash position isn't spectacular. That's honest. But house hacking with 5% down is a long-term wealth strategy, not a cash flow optimization.
How Lenders Calculate Your Qualifying Income
This is where house hacking gets interesting. Lenders don't just look at your W-2 income; they can add a portion of the expected rental income to help you qualify.
Most conventional lenders use 75% of the projected rental income when calculating your debt-to-income ratio. The 25% haircut accounts for vacancy and collection losses.
> Rental income credit: $1,450 × 0.75 = $1,087.50/month
If your gross monthly income is $6,500 and your total debts (including the new mortgage) are $3,500/month, your DTI would normally be 53.8%, which is too high for most lenders.
But with the rental income credit:
> Adjusted DTI: ($3,500 - $1,087.50) / $6,500 = 37.1%
That's a qualifying DTI. The rental income made the deal possible.
One important note: lenders typically require an appraisal with a rental survey to document the projected rent. You can't just claim any number you want. The appraiser will look at comparable rentals in the area.
Reserve Requirements You Need to Know
Unlike single-family homes where reserves are often optional, multi-unit properties require them. Expect to show 2-6 months of mortgage payments in liquid assets after closing.
For our $3,176 monthly payment:
> Minimum reserves: $6,352 (2 months) > Common requirement: $12,704 (4 months)
This doesn't mean you need $12,704 in cash. Reserves can include:
If you have $25,000 saved and need $19,250 for the down payment plus $6,000-8,000 for closing costs, you're cutting it close on reserves. This is a real constraint you need to plan around, either by saving more, finding a lower purchase price, or negotiating seller credits toward closing costs.
Three Mistakes That Kill House Hack Financing
Mistake 1: Ignoring the Self-Sufficiency Test
Some lenders apply a "self-sufficiency test" to 3-4 unit properties. The total rental income (from all units, including yours at market rate) must cover the monthly mortgage payment. If it doesn't, you need a larger down payment or a lower purchase price.
For our duplex example:
> Total potential rent: $1,450 × 2 = $2,900/month > PITI payment: $3,176/month
This property fails the self-sufficiency test. Some lenders will still approve it (especially with strong compensating factors like high credit scores or significant reserves), but others will decline. Ask your lender upfront if they apply this test.
Mistake 2: Overestimating Rental Income
I've seen buyers assume they'll get 10-15% above market rent because their unit has "better finishes" or "more potential." The appraiser doesn't care about your optimism. They'll pull comps for similar units and give you a number. If that number doesn't work for your DTI, you're stuck.
Be conservative. Use actual rental listings in the area, not what you hope to get.
Mistake 3: Forgetting About the Occupancy Requirement
Owner-occupied financing requires you to actually live there. Lenders define this differently, but generally expect you to move in within 60 days of closing and live there for at least 12 months.
If you're planning to "house hack" for three months and then move to your significant other's place across town, you're committing occupancy fraud. This is a federal offense. Take the requirement seriously.
Comparing 5% Down to FHA
FHA loans allow 3.5% down on multi-unit properties, which sounds better than 5%. But FHA comes with trade-offs:
| Factor | Conventional 5% | FHA 3.5% |
|---|---|---|
| Down payment on $385K | $19,250 | $13,475 |
| PMI/MIP | Cancellable at 80% LTV | Permanent for life of loan |
| Property condition | Standard | Stricter requirements |
| Self-sufficiency test | Lender-dependent | Required for 3-4 units |
| Loan limits | Higher in many areas | Lower caps |
The permanent mortgage insurance on FHA loans is the killer. On a $371,525 FHA loan, you'd pay approximately $3,250/year in MIP, forever. With conventional, that PMI goes away once you build equity.
I prefer conventional for house hackers who can swing the extra 1.5% down. The long-term savings on insurance usually outweigh the higher initial cash requirement.
When 5% Down Makes Sense (and When It Doesn't)
Putting 5% down works well when:
It's riskier when:
Running Your Own Numbers
Every market is different. A 5% down house hack in Indianapolis looks completely different from one in San Diego. The ratios change, the break-even points shift, and the strategy that works in one market might not make sense in another.
Before you make any offers, model out the full scenario with your actual numbers. Include PMI, include vacancy assumptions, include maintenance reserves. See what happens if rents drop 10% or if you have two months of vacancy in year one.
The [house hack calculator](/tools/house-hack) can help you run these scenarios quickly. Plug in your specific property, your down payment, your loan terms, and see exactly what your effective housing cost looks like compared to renting.
House hacking with 5% down is possible. Whether it's the right move depends entirely on your numbers.