Can You Buy a Multifamily Home With an FHA Loan?

Buying a multifamily home can be an attractive option for both homeowners and real estate investors. A multifamily property allows you to live in one unit while renting out the others, providing rental income to help cover your mortgage payment. But can you use an FHA loan to buy a multifamily home? Let’s take a closer look.

What is Considered a Multifamily Home?

The definition of a multifamily home depends on who you ask.

• The Federal Housing Administration (FHA) defines a multifamily property as having 5 or more units.

• However, the Department of Housing and Urban Development (HUD) defines a single-family home as having 1-4 units

So a property with 2-4 units would be considered multifamily by the FHA but single-family by HUD, This distinction is important when it comes to FHA loan eligibility

FHA Loans for Owner-Occupied Homes Up to 4 Units

You can use an FHA loan to buy a multifamily home with up to 4 units, as long as you live in one of the units. This falls under HUD’s definition of a single-family home.

With an FHA loan:

• You must occupy one of the units as your primary residence. This is known as “house hacking.”

• You can rent out the other unit(s) to generate rental income.

• You’ll need to qualify for the loan based on your income, credit, and debts. Expected rental income will also be factored in.

• FHA loans allow for low down payments, as little as 3.5%.

So in short, yes you can buy a 2-4 unit multifamily property with an FHA loan, provided you live in one unit. This can be a smart way for first-time homebuyers or real estate investors to get started.

FHA Loan Limits

When getting an FHA loan, note that there are limits on the maximum loan amount based on the number of units:

• 1-unit: Up to $726,525
• 2-units: Up to $930,300
• 3-units: Up to $1,124,475
• 4-units: Up to $1,397,400

The specific limits vary by county and metropolitan area. So make sure the property you want falls within FHA loan limits for that location.

Pros and Cons of FHA Loans for Multifamily Homes

FHA loans offer some advantages for buying a small multifamily property, but also some drawbacks to consider:

Pros

• Low down payment requirement
• Available to buyers with lower credit scores
• Income from renting helps qualify
• Owner-occupied requirement provides built-in tenants

Cons

• Must live in one of the units as your primary home
• Mortgage insurance required, adding to costs
• Tougher appraisal standards than conventional loans
• Lower loan limits than conventional loans

So weigh the pros and cons against your goals to decide if an FHA loan is suitable for your multifamily purchase.

FHA Loans Not Available for 5+ Unit Properties

While you can buy a 2-4 unit property with an FHA loan, FHA financing is not available for larger multifamily buildings with 5 or more units. Those fall outside the scope of a “single-family” home according to HUD.

So if you want to buy an apartment building or other larger multifamily property, you’ll need to look at alternative financing options beyond FHA loans.

Other Financing Options for Multifamily Properties

If you want to purchase a multifamily home that doesn’t qualify for an FHA loan, either due to size or intended use, here are some other financing options to consider:

Conventional Loans

Conventional mortgages can be used to buy multifamily properties of any size. Down payments are usually higher, around 15-20%. But you may get better interest rates than FHA, and can buy the property purely as an investment.

Portfolio Loans

Local banks or credit unions sometimes offer portfolio loans tailored to multifamily purchases in their area. These non-conforming loans can be more flexible than conventional mortgages.

Commercial Loans

Multifamily properties with 5+ units are considered commercial real estate. You can get a commercial mortgage, but expect stricter qualifying standards and higher interest rates.

Hard Money Loans

Hard money loans are asset-based loans from private lenders, secured by the property itself. Interest rates are high but underwriting is easier. They can fund acquisitions more quickly.

Partnership Equity

Joining up with a partner can allow you to bring more equity to the deal. You share ownership of the property in exchange for a cash contribution.

Buying a Multifamily Home – Things to Consider

If you’re interested in buying a multifamily home, here are some key things to think about:

• Intended use – Will it be owner-occupied or purely investment? Will dictate financing options.

• Property management – With multiple tenants, property management is a must. Factor in costs.

• Repairs and maintenance – With more units, expect higher maintenance expenses. Budget accordingly.

• Rental demand – Study the local market to ensure decent rental demand and achievable rents.

• Cash flow – Run the numbers to see if rental income will sufficiently cover mortgage and expenses.

• Licensing and regulations – Be aware of landlord-tenant laws, zoning rules, registrations, and other requirements.

While financing is important, be sure to evaluate all aspects of owning a multifamily rental property before jumping in. With proper planning, it can be a solid real estate investment strategy.

The Bottom Line

• You can buy a 2-4 unit multifamily home with an FHA loan, provided you live in one unit.

• FHA loans not available for “true” multifamily buildings with 5+ units.

• Conventional, commercial, and alternative financing required for larger multifamily properties.

• Weigh pros and cons to decide if an FHA loan fits your goals and property plans.

• Consider all responsibilities and expenses associated with managing a multifamily rental.

A multifamily purchase can be rewarding but requires research and preparation. Understand how FHA loans can or can’t assist you, and seek professional guidance to map out a strategic financing plan. With the right approach, you can successfully invest in multifamily real estate.