Multifamily FHA Loan Requirements: A Deep Dive for Investors

Purchasing multifamily properties can be an attractive real estate investment strategy. The ability to house multiple tenants under one roof provides opportunities for ongoing rental income However, financing a multifamily property comes with unique considerations compared to single-family homes. This is where FHA multifamily loans can help investors access favorable financing terms to add multifamily homes to their real estate portfolios

In this comprehensive guide, we’ll dive into all the key eligibility and underwriting requirements to qualify for an FHA multifamily mortgage. Whether you’re looking to house just a few tenants or operate a larger apartment complex, understanding these FHA policies is crucial for securing financing.

What is an FHA Multifamily Loan?

First, let’s clarify exactly what the FHA classifies as a “multifamily” property. According to FHA guidelines, multifamily properties have 5 or more units in the same structure. Properties with 2-4 units fall under standard FHA single family guidelines.

The FHA multifamily mortgage program provides financing for both small apartment buildings and large scale complexes These government-backed loans make it possible for investors and developers to receive favorable loan terms to add multifamily housing stock

As with all FHA loans, the government insures the mortgage, meaning lenders can offer lower down payments and interest rates since their risk is reduced if the borrower defaults.

Below we’ll explore the key eligibility and underwriting requirements the FHA looks for when approving multifamily financing requests.

Occupancy Requirements

The first major requirement for FHA multifamily loans is based on occupancy. These loans come in two main flavors:

Owner-Occupied – The borrower must occupy one of the units as their primary residence. At least 51% of the building space must be residential.

Non-Owner Occupied – Purely investment properties where the borrower will not live on site. 100% of units are for tenants.

For small residential buildings with 2-4 units, FHA requires owner-occupancy in one of the units. Once you move into the 5+ unit range, non-owner occupied investor loans become available.

When applying, you’ll need to specify whether you plan to owner-occupy or manage the property strictly as a rental investment based on these occupancy rules.

Commercial vs Residential Use

FHA multifamily loans are intended for residential properties. This means at least 51% of the building area must be designated for apartment style living spaces.

However, the FHA does allow mixed-use multifamily properties with commercial space such as storefront retail on the ground floor. Just be aware that no more than 49% of the property can be used for non-residential purposes.

Examples of eligible mixed-use projects include:

• Apartment building with ground floor restaurant or shops
• Apartment complex with a small corner convenience store on site
• Upper floor apartments above street level office spaces

When evaluating property eligibility, the key is ensuring residential apartment units make up the majority of the building.

Location and Building Age Requirements

The FHA has a few requirements surrounding the physical multifamily property itself:

• Not located in an unacceptable environmental zone – The property site cannot be exposed to certain hazardous environmental risks like flooding, erosion, earthquakes, noise pollution, etc.

• Completed or substantially rehabilitated at least 3 years prior to application – This seasoned building requirement helps ensure the property has a proven operating history before being eligible for agency financing.

• Meets HUD minimum property standards – Buildings must comply with HUD’s safety and quality standards. Appraisers inspect properties for deficiencies that would need to be addressed.

Being aware of these location and property eligibility policies will help you search for qualified multifamily projects that meet FHA criteria.

Loan Limits

One of the big advantages of FHA loans is they come with relatively high base conforming loan limits. Here are the current FHA multifamily mortgage limits as of 2023:

• 5 units = $1,581,250
• 6 units = $1,923,750
• 7 units = $2,266,250
• 8 units = $2,608,750
• 9 units = $2,795,000
• 10 units + = Varies by area, up to $3,000,000

Additionally, the FHA offers flexible “high cost” limits for properties in high price markets like New York or San Francisco. These can range up to 175% of the base loan limits.

Reaching out to a lender early when evaluating properties will help you determine the maximum mortgage amount you can qualify for. The FHA ultimately sets limits based on property type, location, and occupancy status.

Commercial Space Underwriting

For mixed-use properties, the amount of financing allowed for commercial space is restricted by the FHA.

No more than 20% of the mortgage amount can be attributed to non-residential commercial space. And the commercial space can only support up to 20% of the property’s overall income.

These limits help ensure the core purpose of FHA loans remains residential housing for tenants. Commercial space can provide supplemental income, but the project must maintain its multifamily housing focus.

Borrower Net Worth Requirements

In order to qualify for non-owner occupied FHA multifamily loans, the borrower or borrowing entity must demonstrate a minimum net worth. The current requirement is at least 20% of the loan amount in verifiable assets.

For example, on a $1 million loan request, the borrower would need about $200,000 in assets and reserves documented to meet the net worth threshold.

This helps demonstrate the borrower has some financial means to support the property if unexpected expenses arise. Net worth guidelines don’t apply to owner-occupied purchases where the borrower lives on site.

Debt Service Reserve Requirements

For properties with 26 units or more, the FHA requires capitalization of a debt service reserve fund. This reserve must equal at least 3 months of required mortgage payments for the property.

For example, if your monthly mortgage payment is projected to be $10,000, you would need to fund a $30,000 debt service reserve. This provides a financial buffer in case the property’s rental income is temporarily disrupted.

Borrower Credit and Income Requirements

While less strict than conventional loans, FHA multifamily mortgages do have minimum credit and income requirements for approval.

Credit – A minimum 620 FICO score is generally required. And borrowers can’t have a recent history of foreclosures or bankruptcies.

Income – The borrower must demonstrate adequate and stable overall income and cash flow to cover mortgage payments and building operating expenses. A debt-to-income ratio below 55% is preferable.

Multifamily Management Experience – Having a history of successfully operating multifamily rentals helps demonstrate you have the expertise to manage the property and repay the loan.

Meeting these requirements helps provide the FHA with confidence you can successfully operate the building, manage tenants, and pay the mortgage.

Loan Terms and Rates

FHA multifamily loans provide the below favorable rates and terms:

• Down payments as low as 10% for market rate properties or 20% for affordable housing
• Interest rates below conventional loans (typically around 0.5% lower)
• Loan terms up to 40 years with interest-only periods available
• Non-recourse financing available where the FHA can only take the property if defaulted, not other assets

This financing can make acquiring and operating multifamily buildings more affordable for borrowers. The relatively low down payment and competitive interest rates provide flexibility compared to other mortgages.

Appraisal and Environmental Review

All FHA multifamily properties must go through a detailed appraisal and environmental review:

Appraisal – Done to confirm the property value matches the amount requested for financing. The appraiser looks at rental income potential, building condition, and comparable property values.

Environmental Review – Required to identify potential hazards like asbestos, lead paint, soil contamination, flood zones, etc. Any identified issues must be addressed.

These reviews help the FHA appropriately assess property risks prior to providing financing.

Loan Underwriting and Processing Timelines

FHA multifamily loans go through extensive underwriting and reviews. The typical timeline is 90 to 180 days from submission to approval and funding.

Here is an overview of the process:

• 30 to 60 days for loan underwriting including background checks on borrower
• 30 to 60 days for appraisal and environmental reviews
• 30 to 60 days for loan approval by HUD after underwriting

The extensive approval process requires patience, but results in favorable loan terms. Be sure to account for these timeframes when making purchase offers and planning renovations.

Choosing the Right Lender

Not all lenders can underwrite and process FHA multifamily loans. Make sure to choose an experienced lender that regularly works with these unique property types.

Ask about their recent multifamily lending volume, construction loan capabilities if renovations are needed, and how they can streamline the approval process.

The bottom line is that FHA multifamily loans provide flexible financing options for residential buildings with 5+ units. Just be aware