Everything You Need to Know About 5% Down Conventional Loans for Multifamily Homes

Purchasing a multifamily property can be an excellent way to generate rental income while living in one of the units. This helps offset your housing costs. In the past, these types of homes required large down payments of 15-25%. But new options from Fannie Mae now allow multifamily financing with as little as 5% down.

In this comprehensive guide, we’ll cover

• Overview of 5% Down Conventional Multifamily Loans
• Benefits of Low Down Payment Options
• Property and Transaction Eligibility
• Qualification and Documentation Requirements
• Interest Rates, Fees, and Closing Costs
• Tips for Getting Approved
• Using Rental Income to Offset Your Mortgage

Understanding the eligibility and process for 5% down conventional multifamily loans can help you successfully invest in a rental property,

Overview of 5% Down Conventional Loans for Multifamily Homes

In November 2023, Fannie Mae introduced conventional mortgages requiring just 5% down for owner-occupied 2-4 unit properties. This includes:

• Duplexes
• Triplexes
• Fourplexes

These loans are backed by Fannie Mae but issued through private lenders. Offerings include:

• 30-year fixed-rate mortgages
• 15-year fixed-rate mortgages
• 5/1, 7/1, and 10/1 adjustable-rate mortgages (ARMs)

After years of requiring 15-20% down for multifamily homes, this new option makes affordable financing more accessible.

Key Benefits of 5% Down Conventional Multifamily Loans

The introduction of 5% down conventional financing for multifamily homes provides several advantages:

• Lower down payments – Only 5% down versus the previous 15-25% requirement

• Easier access to homeownership – Reduced down payment improves affordability

• Generate rental income – Helps offset mortgage payments with income from extra units

• Build equity – Purchase the property and start accumulating equity sooner

• Leverage appreciation – Benefit from rising property values while paying down the mortgage

• Greater flexibility – Choose from fixed or adjustable-rate terms up to 30 years

The bottom line is that lower down payment conventional multifamily mortgages open investment opportunities to more buyers. But you still need to meet eligibility standards.

Multifamily Loan Property and Transaction Eligibility

While down payments are lower, these mortgages have some property and transaction requirements:

• Owner-occupancy in one of the units
• 2-4 residential units on a single property
• Single-family homes converted to multifamily may not be eligible
• Loan amounts up to conforming limits ($726,200)
• Purchase, rate/term refinance or cash-out refinance transactions
• Existing properties only – no construction loans

You’ll also need to review any HOA rules on leasing ratios and rental restrictions. But overall, getting approved is primarily based on your personal finances and credit.

Multifamily Mortgage Qualification Requirements

When applying for a 5% down conventional multifamily loan, lenders review:

Credit History

• Minimum 620 credit score recommended but depends on lender
• Must have sufficient credit history depth and clean recent payments

Income Documentation

• Tax returns, W-2s, paystubs to document income
• Proposed rents to supplement your personal income

Debt-to-Income Ratio

• Maximum 50% debt-to-income ratio including mortgage payment and debts

Cash Reserves

• Expect reserves of 6-12 months mortgage payments

Down Payment

• Minimum 5% down required
• More down reduces risk and may improve loan terms

Meeting these standards shows lenders you can manage the mortgage long-term.

Interest Rates, Fees, and Closing Costs

Here are typical costs associated with 5% down conventional multifamily mortgages:

Interest Rates

• 30-year fixed rates in the 7-8% range
• 5/1 ARM rates around 6-7%

Origination & Underwriting Fees

• Up to 1% of loan amount

Closing Costs

• Average of 3-5% of loan amount
• Includes appraisal, inspection, title, recording fees

Mortgage Insurance

• Required with less than 20% down
• Costs 0.25%-1.75% of loan amount annually

Aim for 20% down to avoid mortgage insurance. But even at 5% down, competitive rates without huge fees make these loans affordable.

Tips for Getting Approved for a 5% Down Conventional Multifamily Mortgage

Here are some tips to boost your chances of getting approved:

• Shop lenders – Compare loan offers and pre-approvals from multiple lenders
• Highlight experience – Tout property management expertise if you have it
• Start early – Begin the mortgage process well in advance of your target purchase date
• Mind your credit – Maintain excellent credit and minimize new credit lines
• Lower your DTI – Pay down current debts to reduce your debt-to-income ratio
• Save for closing – Have funds on hand for down payment, closing and moving
• Document income – Get tax returns, W2s, and financial statements in order
• Explain negatives – Clearly address past credit issues or problems

The bottom line is the lower down payment option creates more accessible financing. But you still need to put your best foot forward with your application.

Using Rental Income to Offset Your Mortgage Payment

The key benefit of buying a multifamily home with 5% down is using rental income to cover or offset your mortgage payment and expenses. This helps reduce the burden on your personal income.

Here are tips for making the numbers work in your favor:

• Do your homework – Estimate realistic rental rates and expected vacancies for your market. Don’t overestimate potential income.

• Factor in expenses – Remember property taxes, insurance, maintenance and other costs of managing the units.

• Qualify cautiously – Don’t push to qualify for maximum payments you can’t comfortably handle if units sit vacant.

• Build a reserve – Have a contingency fund for maintenance costs and periods of vacancies.

• Start small – If new to real estate investing, a duplex may be better than a fourplex initially.

• Use long-term leases – Lock in reliable tenants with 1-2 year leases to stabilize your income.

With preparation and realistic expectations, rental income can provide a nice subsidy towards your housing costs and mortgage payment.

The Bottom Line

• Conventional loans with 5% down open multifamily investment properties to more buyers.
• Lower down payments combined with rental income improve affordability.
• You still need to qualify based on credit, income, reserves, and property eligibility.
• Proper planning and budgeting are vital to ensure rental income reliably covers mortgage payments.

The bottom line is that 5% down conventional multifamily mortgages can now help you get started investing in rental real estate. Just be sure to run the numbers carefully and find the right lending partner.

Frequently Asked Questions

What credit score do you need for a 5% down multifamily mortgage?

A minimum credit score around 620 is generally recommended for 5% down conventional multifamily loans. But requirements vary by lender. Excellent credit in the 740+ range will get you better rates.

How much income do you need to qualify for a 5% down multifamily home loan?

There are no set income requirements. But lenders want to see you have enough personal income to reasonably afford the mortgage payment even if units were vacant. Expect to provide tax returns and documentation of assets.

What are the mortgage insurance requirements at 5% down?

With less than 20% down, private mortgage insurance (PMI) is required. This adds 0.25%-1.75% to your annual interest rate depending on your credit and down payment amount.

Do you have to live in one of the units with a 5% down multifamily loan?

Yes, there is an owner-occupancy requirement with the new 5% down conventional multifamily loans from Fannie Mae. You must live in one of the units as your primary residence.

How many units can you purchase with 5% down?

The conventional multifamily loans at 5% down are limited to 2-4 unit residential properties. This includes duplexes, triplexes, and fourplexes.