can you buy a duplex with an fha loan

Can You Buy a Duplex with an FHA Loan? A Complete Guide

Buying a duplex with an FHA loan is an excellent way for first-time homebuyers to enter the real estate market An FHA loan allows you to purchase a duplex with as little as 3.5% down while living in one unit and renting out the other.

This strategy, commonly known as “house hacking” has gained popularity in recent years. Not only does it allow you to become a homeowner, but it also generates rental income to help pay the mortgage.

In this comprehensive guide, we will cover everything you need to know about purchasing a duplex with FHA financing, including:

• Overview of FHA Loans
• Benefits of Buying a Duplex
• FHA Loan Requirements
• Down Payment and Mortgage Insurance
• Owner Occupancy Rules
• Using Rental Income to Qualify
• Loan Limits
• Application Process
• Pros and Cons
• Alternatives to FHA

Let’s dive in!

Overview of FHA Loans

FHA loans are government-backed mortgages insured by the Federal Housing Administration (FHA). They make homeownership more accessible by requiring lower down payments and credit scores compared to conventional loans.

Here are some key features of FHA loans:

• Down payments as low as 3.5%
• Available to buyers with credit scores starting at 580
• Lower mortgage insurance premiums than conventional loans
• Can be used to purchase single-family homes, duplexes, triplexes, and fourplexes

FHA loans offer flexible credit and down payment requirements for qualifying borrowers. This makes them ideal for first-time homebuyers who want to purchase a duplex.

Benefits of Buying a Duplex

Purchasing a duplex with an FHA loan provides several advantages:

• Generate rental income: The rent from the second unit helps pay the mortgage and expenses. This lowers your housing costs.

• Build equity: You gain equity in two properties while only buying one. Equity grows as you pay down the mortgage and as the property appreciates.

• Leverage: You control two units while only needing a small down payment. This allows your investment dollars to go further.

• Appreciation: The property value increases on both units. If housing prices rise, your equity doubles compared to owning a single-family home.

• Mortgage interest deduction: You may be able to deduct mortgage interest on both units, reducing your taxable income.

• Hedge against inflation: Rental income rises alongside inflation, while your fixed-rate mortgage payment stays the same.

FHA Loan Requirements

To qualify for an FHA loan to purchase a duplex, you must meet these general requirements:

• Credit score of 580 or higher
• Debt-to-income ratio below 50%
• At least two years of consistent employment history
• Sufficient income to afford the monthly payments
• Legal permanent resident or U.S. citizen

The FHA has minimum credit score requirements but individual lenders may have higher overlays. Shop around with different lenders to find the most competitive rates and terms.

Down Payment and Mortgage Insurance

One of the biggest advantages of an FHA loan is the low down payment requirement. You only need 3.5% of the purchase price for the down payment. On a $400,000 duplex, that equals $14,000.

The down payment can come from your own funds, gifts, grants, or other eligible sources.

Along with the down payment, you will pay an upfront mortgage insurance premium of 1.75% of the loan amount. This can be rolled into the mortgage. There is also an annual mortgage insurance premium of 0.80% of the loan amount.

This mortgage insurance protects the lender in case you default. While an added cost, FHA mortgage insurance rates are lower than what you would pay on a conventional loan with less than 20% down.

Owner Occupancy Rules

To purchase a duplex with an FHA loan, you must plan to occupy one unit as your primary residence for at least one year after closing. You can rent out the other unit immediately.

You cannot use an FHA loan to buy a duplex as a pure investment property. The owner occupancy rule requires you to live in one unit.

However, after living in the property for a year, you have the flexibility to move out and rent both sides. Many real estate investors utilize FHA financing to “house hack” a duplex, build equity, and obtain rental history before moving out.

Using Rental Income to Qualify

A major benefit of FHA loans is the ability to use expected rental income to qualify for the mortgage.

If you plan to rent the second unit, the lender will factor in 75% of the projected fair market rent from that unit when calculating your debt-to-income ratio. This can help you afford a more expensive duplex than if relying on your personal income alone.

You do not need existing landlord experience to count rental income for qualifying purposes. However, you will need to provide a valid lease agreement for the rental unit to document the income.

The lender will order an appraisal that estimates fair market rent for the rental unit. As long as the unit is in good shape, you can use most of this projected rent amount to hit your desired debt-to-income ratio and loan approval.

Loan Limits

The FHA has loan limits on the maximum mortgage amount they will insure based on the number of units and location. Loan limits are higher for duplexes than for single-family homes.

For a duplex in 2023, the FHA national loan limit is $770,000. In high-cost areas, the limit can go up to $1.2 million or more. Loan limits vary by metro area.

Always check the specific loan limits for your county to ensure you do not exceed the caps when applying for an FHA duplex mortgage.

Application Process

Follow these steps when getting an FHA loan to buy a duplex:

• Get pre-approved – Confirm you meet credit, income, and down payment requirements
• Shop for a duplex – Work with a local real estate agent to find good options
• Make an offer – Submit a competitive purchase offer and get it accepted
• Provide financing info – Send purchase contract and lease agreements to lender
• Get appraisal – Appraiser will estimate property value and market rent
• Submit docs – Provide all required documentation to underwriting
• Get final approval – You will receive a clear-to-close once approved
• Close on property – Review closing disclosure, sign papers, then get keys!

The lender will guide you through every step. It’s a straightforward process much like buying any other home.

Having financing pre-approval before making an offer also gives you a competitive edge compared to other buyers.

Pros of Using an FHA Loan for a Duplex

Here are some of the top advantages of purchasing a duplex with FHA financing:

• Low 3.5% down payment requirement
• Lenient credit score requirements starting at 580
• Ability to use 75% of projected rents to qualify
• Higher loan limits than for single-family homes
• Owner occupancy provides flexibility to rent both sides later
• Streamlined application process

Cons of Using an FHA Loan for a Duplex

The downsides of utilizing an FHA loan for a duplex purchase include:

• Must pay mortgage insurance premiums
• Limited to living in one unit for first year
• Must meet ongoing owner occupancy rules
• Additional rental property management responsibilities
• Slower equity buildup than 20%+ down mortgages
• Refinancing into conventional loan can be difficult

While very accessible, FHA financing is not for every duplex buyer. Conventional loans with higher down payments avoid some cons but have stricter qualifying requirements.

Alternatives to FHA Financing

If you do not want to use an FHA loan, here are some alternative financing options for buying a duplex:

Conventional Loans:

• Require 5-20% down payment
• No mortgage insurance with 20% down
• Can buy duplex as investment property
• Tougher credit and income requirements

Portfolio Loans:

• Offered by community banks
• More flexible qualifying criteria
• Higher interest rates and fees

VA Loans:

• Zero down payment option for eligible veterans
• Fees and mortgage insurance still apply

USDA Loans:

• Zero down loans in designated rural areas
• Limited availability based on location

Hard Money Loans:

• Easy to qualify, fast funding
• Very high rates and fees
• Usually short-term financing

Pick the mortgage type that best aligns with your financial situation, goals, and the specific property you want to buy. An FHA loan provides a nice balance of affordability and flexibility for owner-occupants purchasing their first duplex home.

The Bottom Line

Yes, you can absolutely purchase a duplex using an FHA loan as long as you live in one unit as your primary residence. FHA financing offers low down payments, flexible credit requirements, and unique benefits for owner-occupants buying their first duplex.

With proper preparation and understanding of the mortgage guidelines, an FHA loan can help you successfully invest in real estate while becoming a homeowner. Consult truste