Everything You Need to Know About Getting an FHA Loan for a Multifamily Property

If you’re looking to invest in real estate buying a multifamily property can be a great way to build wealth. With a multifamily property, you can live in one unit and rent out the others to generate cash flow. This strategy, known as “house hacking” allows you to have your housing expenses partially or fully covered by rental income.

One popular loan program for financing multifamily properties is the Federal Housing Administration (FHA) loan FHA loans offer more flexible qualifying guidelines than conventional loans, making them accessible to more buyers. However, FHA loans have specific requirements when it comes to multifamily properties

In this comprehensive guide we’ll cover everything you need to know about getting an FHA loan for a multifamily property including

• What is an FHA loan?
• FHA loan requirements
• Types of FHA loans for multifamily properties
  • Owner-occupied
  • Non owner-occupied
• Pros and cons of FHA loans for multifamily properties
• Alternatives to FHA loans
• FAQs

Let’s dive in!

What is an FHA Loan?

An FHA loan is a mortgage insured by the Federal Housing Administration. Because the FHA insures the loan, lenders are able to offer more flexible qualifying criteria.

Some key features of FHA loans include:

• Low down payments – only 3.5% required
• Lower credit score requirements – minimum 580 FICO
• Low mortgage insurance premiums
• No income limits

These features make FHA loans attractive to first-time homebuyers and buyers with less-than-perfect credit. FHA loans can be used to purchase single-family homes, duplexes, triplexes, and fourplexes.

FHA Loan Requirements

To qualify for an FHA loan, you’ll need to meet certain requirements:

• Credit score – At least 580 FICO for 3.5% down payment. 500-579 scores may qualify with 10% down.
• Debt-to-income ratio – Max ratios of 43% front-end and 50% back-end.
• Cash reserves – Varies by lender but often 1-2 months of mortgage payments.
• Downpayment – Minimum 3.5% of purchase price.
• Property type – Single-family homes, duplexes, triplexes, fourplexes. No condos or co-ops.
• Owner occupancy – For multifamily properties, borrower must occupy one of the units.

In addition to these baseline requirements, the property itself must pass an FHA appraisal. The appraisal ensures the property is safe, sound, and meets FHA standards.

Types of FHA Loans for Multifamily Properties

The FHA offers two main loan types that can be used to purchase multifamily properties – owner-occupied and non owner-occupied.

Owner-Occupied

With an owner-occupied FHA loan, the borrower must live in one of the units as their primary residence. These loans can be used to purchase properties with 2-4 units.

This is the most common type of FHA multifamily loan, often used by real estate investors doing house hacking. Living in one unit while renting the others allows investors to offset their housing costs.

Owner-occupied FHA loans for multifamily properties have the same requirements as regular FHA loans. However, lenders will also consider rental income when qualifying borrowers.

Non Owner-Occupied

FHA also offers loans for non owner-occupied multifamily properties with 5+ units. These loans are geared more towards larger real estate investors rather than individual homebuyers.

To qualify for these loans, borrowers must meet stricter requirements including:

• Minimum credit score of 660
• Larger down payment, usually 25%
• More cash reserves
• Experience managing rental properties

Additionally, these loans can only be used to purchase or refinance existing multifamily rental housing. New construction and extensive renovations do not qualify.

The property itself must also meet eligibility requirements set by HUD. For example, it must have been completed more than 3 years ago and have a minimum occupancy of 85%.

Pros and Cons of FHA Loans for Multifamily Properties

Pros

• Low down payment of 3.5%
• More flexible qualifying guidelines
• Interest rates may be lower than conventional loans
• Renovation costs can be rolled into loan amount

Cons

• Must be owner-occupied for 2-4 unit properties
• Monthly mortgage insurance premiums
• Loan limits may be too low in expensive markets
• Tougher appraisal standards

As with any loan program, there are tradeoffs to consider when using FHA financing. Make sure to weigh the pros and cons based on your specific situation and goals.

Alternatives to FHA Loans

If an FHA loan doesn’t fit your needs, here are some other options for financing a multifamily property:

Conventional loans – May offer lower rates and higher loan limits than FHA loans. Often require 20% or more down payment.

Portfolio loans – Offered by community banks and credit unions. More flexible qualifying and can finance properties that don’t conform to agency guidelines.

Lines of credit – Can be used to purchase investment properties. Require only interest payments during draw period.

Hard money loans – Asset-based loans from private lenders. Quick to close but have high rates and fees. Best for short-term financing.

Private money loans – Similar to hard money loans but slightly lower rates. Also fast to close and less strict qualifying.

Commercial loans – For larger apartment buildings and multifamily complexes. Have stricter eligibility requirements.

FAQs about FHA Loans for Multifamily Properties

How many units can you buy with an FHA loan?

For owner-occupied properties, FHA loans can be used to purchase 2-4 unit buildings. For non owner-occupied, FHA insures loans for 5+ unit multifamily properties.

Can you get an FHA loan for a duplex?

Yes, you can get an owner-occupied FHA loan to purchase a duplex property, provided you live in one unit as your primary residence.

What is the maximum FHA loan amount?

FHA loan limits vary by county but range from $420,680 in low cost areas to over $1 million in high cost areas like New York and San Francisco. Actual loan amount depends on the appraised value of the property.

Does a multifamily property have to be FHA approved?

Yes, any property purchased with an FHA loan must meet FHA minimum property standards and pass an FHA appraisal.

Can you use rental income to qualify for an FHA loan?

For owner-occupied 2-4 unit properties, 75% of the gross rental income can be used to qualify. Net rental income is used for qualifying on 5+ unit non owner-occupied properties.

The Bottom Line

FHA loans can be a great option for financing multifamily investment properties thanks to low down payments and flexible qualifying. Just make sure you understand the specific requirements, especially when it comes to owner occupancy. And compare FHA loans to alternative loan programs to find the best fit for your situation. With the right financing strategy, you can successfully purchase a multifamily property and begin building your rental income!