Can I Buy a Duplex with an FHA Loan?
Buying your first home is an exciting milestone in life. And for some buyers purchasing a duplex or multifamily property may be a great option to achieve that dream. If you’re wondering if you can use an FHA loan to buy a duplex, the answer is yes – with some caveats.
What is an FHA Loan?
An FHA loan is a mortgage insured by the Federal Housing Administration. This government agency is part of HUD and helps make homeownership more accessible and affordable.
FHA loans require just a 3.5% down payment, which is far lower than the typical 20% down needed for conventional mortgages. They also have more flexible credit requirements, with minimum scores around 580. Additionally, FHA allows gift funds for the entire down payment amount.
While FHA loans make buying easier, they do come with mortgage insurance premiums you’ll pay monthly in addition to your regular payment. But for many, FHA is the best or only route to homeownership.
FHA Loan Requirements
Here are the basic requirements to qualify for an FHA mortgage:
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Credit score of 580 or higher
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Total debt-to-income ratio below 50%
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At least 3.5% down payment
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Owner-occupy the property
Beyond those simple guidelines, FHA has limits on the type and condition of property. All homes must be residential and meet HUD’s minimum quality standards. Investment properties or “fixer uppers” don’t qualify.
Occupying the Property
One key FHA stipulation is that you must live in the home as your primary residence. This “owner occupancy” rule applies whether you buy a single-family house or multifamily property.
FHA sees duplexes and other small multifamily homes as primary residences, not investment properties. So you can buy a duplex, triplex, or fourplex with an FHA loan, but you’ll need to occupy one of the units.
Buying a Duplex
When using an FHA loan to buy a duplex, triplex, or fourplex, there are a few extra steps and requirements to know.
Down Payment
You’ll make the same minimum 3.5% down payment whether buying a single-family home or duplex. The down payment is based on the total purchase price or appraised value of the property, whichever is less.
Gift funds from relatives can cover your entire down payment as well. The donor simply needs to provide a gift letter stating the money doesn’t need to be repaid.
Qualifying with Rental Income
One major benefit to FHA duplex loans is you can use expected rental income to help you qualify. If one unit is vacant, the lender will order an appraisal estimating market rent. If occupied, they’ll use 75% of the lesser of:
- Fair market rent per the appraisal
- Actual current rent of the unit
You don’t need prior landlord experience to count rent from the other unit(s). The appraiser and lender will estimate rents and vacancy rates.
For example, if the appraisal shows $1,000 in market rent for Unit A, you could apply $750 per month toward your income qualifications. This additional “income” can help you get approved.
Loan Limits
Loan limits are also higher when buying a 2- to 4-unit property with FHA. The 2023 base conforming limit for a single-family home is $431,000. But for a duplex, the limit increases to $541,250.
In high-cost areas like San Francisco or New York, FHA’s ceiling on a duplex mortgage can exceed $1 million. Look up your county’s exact FHA loan limits based on property type.
Pros and Cons of an FHA Duplex
Buying a duplex with an FHA loan has multiple benefits but also some drawbacks to weigh.
Pros:
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Low 3.5% down payment
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Use 75% of market rents to qualify
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More buying power with higher loan limits
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Become a homeowner and build investment
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Potentially lower housing costs with rental income
Cons:
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Must live in one unit as owner-occupant
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Larger down payment than single-family home
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Ongoing FHA mortgage insurance premium
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Cannot buy as pure investment property
As you can see, FHA can make buying a duplex more feasible, especially for first-time homebuyers. But the owner-occupancy rule does limit this loan’s flexibility versus conventional mortgages.
Alternatives to an FHA Duplex Loan
If you don’t want to live in one unit yourself, FHA loans don’t allow buying a duplex as a pure investment property. You’ll need to look at the following alternative mortgages instead:
Conventional 97 Loan
In late 2022, Fannie Mae and Freddie Mac introduced a new conventional loan needing just 3% down. It offers more flexibility than FHA, as you can buy a duplex and rent out both units. However, it requires a higher 620 minimum credit score.
Other Low Down Payment Options
The 80/10/10 piggyback loan lets you buy a duplex with 10% down by combining a first and second mortgage. Or mortgage programs like HomeReady and Home Possible can require between 3-5% down with flexible credit and income requirements.
Portfolio Loans
Local banks and credit unions often offer low down payment portfolio mortgages without conforming loan limits. These programs can be more customized for investors and duplex buyers.
Hard Money Loans
Also called private money or asset-based financing, hard money loans come from private individuals instead of banks. They carry higher rates and costs but can finance a duplex purchase with less than 20% down.
Buying a duplex takes more capital than a single-family residence. But innovative new mortgage options are making multifamily properties more accessible, especially when leveraging an FHA loan.
FHA Duplex Loan Requirements
Here’s a quick recap of the key requirements when using an FHA mortgage to buy a duplex:
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Minimum 3.5% down payment
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Must live in one of the units
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Credit score of 580+
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Count 75% of appraised market rent toward income
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Loan limits higher than single-family homes
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1- to 4-unit residential properties qualify
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Cannot buy as pure investment property
Overall, FHA loans offer a great pathway for first-time buyers to purchase a duplex or small multifamily home. The low down payment and flexible qualifying guidelines help expand purchasing power.
Just remember you’ll need to occupy one unit when using this government-backed financing option. But you can still collect rent from the other unit(s) to offset your housing costs.
If you meet all the requirements, answer those nagging questions from friends and family by proudly proclaiming, “Yes I bought a duplex with an FHA loan!”
Frequency of entities:
can i buy a duplex with an fha loan: 20
fha loan: 15
duplex: 14
down payment: 7
loan limits: 5
rental income: 4
owner occupy: 4
qualify: 3
multifamily: 3
mortgage insurance: 2
conventional loan: 2
The main advantages to owning a multi unit property are the following;
- Leverage rental income to offset or pay your monthly mortgage.
- Use the income from the rental to increase your buying power, lenders can count 75% of market rate rental towards your income if the property is vacant and 75% of the actual rent if the unit is occupied towards your monthly income to help you qualify for more. Meaning you could potentially get into a better home, or neighborhood.
- When your tenant is paying some or all of your mortgage you can save SO much money for emergencies, life goals and even future properties!
To break this down I connected with one of Living Room’s Partner lenders James Adair at Neo Home loans to give us the numbers on a property recently sold by Kim Parmon so you can actually see how this pencils out.
“Using the FHA loan program is a fantastic way to access multi unit properties IF you plan to owner occupy.
With both mortgage interest rates AND home prices rising, the cost to buy and hold real estate has simply never been higher, and it is pressuring the house hold incomes of many families. Buying a property that has more than one living space means you can offset your mortgage payments with the rental income on the other unit.
Buying a Duplex? Here’s Why You Should Buy One With A FHA Loan
Can you buy a duplex with an FHA loan?
As a result of these requirements, people who buy duplex homes using FHA loans typically plan to live in one of the units and rent out the other. So the multifamily house essentially becomes a home as well as an investment property. The key caveat here is that the FHA borrower needs to be an owner-occupant, meaning they plan to reside in the home.
Can you buy a duplex and a multifamily home?
Purchasers of duplexes and multifamily homes of no more than four units have access to the same residential loans as single-family buyers. You must live in the property in order to qualify for FHA or VA loans, otherwise it will be treated as an investment property.
Can you get a mortgage if you live in a duplex?
If the rental income can cover your mortgage payments, you’ll essentially be living in your duplex for free and building equity to boot. Living in the building allows you to qualify for loans backed by the Federal Housing Administration ( FHA loans) and the Department of Veterans Affairs ( VA loans ).
Can you buy a duplex with a conventional loan?
Most people associate conventional loans with single-family homes. That’s likely because they make up the majority of home mortgages. But did you know you can also obtain conventional lending for properties of up to four units? This means you can buy a duplex, triplex, or fourplex (often called a quadplex) with the benefits of a conventional loan.
Can I buy a duplex with 75% rental income?
By using 75% of the rental income on the second unit of your duplex, you immediately experience a 27% increase in your income towards qualifying for the larger loan size. We have discussed the FHA 2 unit guidelines above. When buying a tri-plex or a four-plex, a downpayment of 3.5% is still all that is required for an FHA loan.
Can you buy a duplex with a VA loan?
Then you could use a VA loan for your duplex or multifamily purchase—as long as you aim to live on the property. VA loans require no down payment, and they offer easier qualification standards and lower closing costs, too. They also don’t require private mortgage insurance or a minimum credit score.