With an FHA loan, you can purchase a property with lower credit score and down payment requirements, saving you money upfront. Naturally, if you want to get into real estate investing or purchase a large, multiunit property, you might want to take advantage of an FHA loanâs flexible credit requirements.
FHA restrictions and different definitions of âmultifamily homeâ may make this financing option somewhat complicated for an investor. But, under the right circumstances, an FHA multifamily loan may be useful. Letâs break down how an FHA multifamily loan works, review the definition of a multifamily home and explore alternative financing options.
Buying a multifamily home can be an attractive option for both homeowners and real estate investors. A multifamily property gives homeowners the ability to live in one unit while renting out the others creating rental income. For investors, multifamily properties can generate ongoing cash flow from rent payments. But can you use an FHA loan to buy a multifamily property?
The answer is complicated. The Federal Housing Administration (FHA) provides mortgage insurance on loans made by FHA-approved lenders. This mortgage insurance makes lenders more willing to approve borrowers with lower credit scores or smaller down payments. However, the FHA has strict requirements on the types of properties eligible for FHA financing.
In this article we’ll explain
- The FHA definition of a multifamily home
- Using FHA loans for owner-occupied multifamily properties
- FHA loans for multifamily investment properties
- Alternative multifamily financing options
- Pros and cons of using FHA loans
Let’s dive in!
What is the FHA Definition of a Multifamily Home?
The FHA considers a multifamily home to be any property with 5 or more units. Properties with 1-4 units are still classified as “single family” by FHA guidelines.
The Department of Housing and Urban Development (HUD) provides the guidance on property eligibility for FHA loans. According to HUD, the FHA can insure mortgages for single family homes occupied by the owner as their primary residence.
Within the single family designation, HUD includes homes with up to 4 units on the property. So an owner-occupied property with 2-4 units can be eligible for FHA financing, despite having multiple families living on site.
Using FHA Loans for Owner-Occupied Multifamily Properties
The FHA mortgage program was originally designed to help more Americans realize the dream of homeownership. By providing mortgage insurance, the FHA allows buyers to qualify for a loan with a lower down payment and credit score.
To align with its mission, the FHA requires any single family property with 2-4 units to be owner-occupied to qualify for FHA financing. At least one of the units must be the primary residence of the buyer.
This requirement allows the buyer to live in one unit as their primary home while renting the other unit(s) out. The rental income can supplement the mortgage payment and makes the property more affordable.
For example, you find a duplex near your office. You want to live in one unit to shorten your commute. By renting the other unit to a tenant, the rental income helps cover your monthly costs. An FHA loan may help you buy the duplex with just a 3.5% down payment.
The FHA has specific requirements on calculating rental income when qualifying borrowers for the mortgage:
- A professional appraisal must estimate fair market rent on all units.
- For properties with 3-4 units, the appraised rent must total at least enough to cover the full monthly mortgage payment.
- The calculation includes a 25% vacancy factor to account for periods of lost rent between tenants.
Meeting these rental income requirements provides reassurance to the lender that the FHA-insured loan can be repaid.
FHA Loans for Larger Multifamily Investment Properties
Once a property exceeds 4 units, the FHA no longer considers it a single family residence. Properties with 5+ units fall under the FHA definition of multifamily housing.
Unlike 1-4 unit properties, the FHA does not require owner-occupancy for multifamily housing loans. This opens the door for real estate investors to use FHA financing.
However, the FHA multifamily loan program has strict eligibility requirements:
- Properties must have 5+ units with complete kitchen and bathroom facilities in each unit
- Properties must have been completed or substantially rehabilitated at least 3 years prior to application
- Program is open to both nonprofit and for-profit borrowers
- Available for purchasing, refinancing, renovating, or constructing multifamily housing
- Specific programs for housing for seniors (Section 232) and those with disabilities (Section 811)
Very few mortgage lenders participate in FHA multifamily lending because of the narrow property eligibility and specialized underwriting knowledge required. Large apartment complexes are more likely to seek commercial mortgages than FHA multifamily loans.
But for small-to-medium sized apartment buildings or mixed-use properties, FHA multifamily loans can fill a need for flexible financing.
Alternative Multifamily Mortgage Options
Beyond FHA loans, buyers and real estate investors have other options for financing a multifamily property purchase:
Conventional Loans – Allows for buying multifamily homes up to 4 units as a primary residence or investment property. Down payments usually range from 15-30%. May have lower interest rates than FHA.
Jumbo Loans – For buying high-value properties above conforming loan limits. Have stricter eligibility requirements than conforming loans. Useful if FHA loan limits are too low for the multifamily purchase.
Commercial Loans – Specifically for investment properties viewed as a business, not a residence. Tend to have higher interest rates and strict eligibility, but more flexible use of funds since it is not tied to owner-occupancy.
Portfolio Lending – Some banks offer portfolio lending programs outside of government-backed mortgages. May be more flexible than conforming loans if you have an established banking relationship.
Hard Money Loans – Useful for fix-and-flip investors who need quick financing for major renovations prior to selling. Come with higher rates and fees compared to other options.
Weighing the Pros and Cons of FHA Multifamily Loans
FHA multifamily loans can be a viable option in certain situations, but may not be the best fit universally. Consider the key pros and cons when evaluating using an FHA loan:
Pros
- Low down payments, with as little as 3.5% down
- More flexible credit score requirements
- Lower interest rates than other non-conforming loans
- Renovation financing available via 203(k) program
- Refinancing existing multifamily property can provide cash-out
Cons
- Requires owner-occupancy for 1-4 unit properties
- Strict eligibility for 5+ unit multifamily properties
- Limit on number of units, unlike commercial loans
- Monthly mortgage insurance premiums required
- Loan limits may be too low in high cost areas
- Tougher appraisal standards than conventional loans
As with any major financial decision, it is wise to explore all your mortgage options before settling on FHA multifamily lending. An experienced loan officer can help you evaluate the pros, cons, and tradeoffs to find the optimal loan program.
While the FHA provides more flexible qualifying criteria than conventional mortgages, the program rules limit using FHA financing strictly for investment purposes. For real estate investors seeking larger multifamily holdings or flexibly using funds from the property, alternative loan programs may be preferable.
But for an owner-occupant purchasing their first multifamily home, an FHA loan can be an affordable way to enter the market and start building rental income. The key is understanding program guidelines and consulting knowledgeable mortgage professionals to map the best path to your real estate goals.
The Pros And Cons Of Using FHA Loans To Buy Multifamily Homes
Using an FHA loan to purchase a multifamily home with up to 4 units may benefit prospective home buyers, but they should weigh the pros and cons.
- Easier to get approved: Because FHA loans are backed by the U.S. government, lenders are more willing to provide loans to home buyers who would have struggled to meet conventional mortgage requirements due to past credit issues.
- Lower credit score requirements: FHA loans require a 580 credit score or at least a credit score of 500 if you can make a 10% down payment. The FHA credit score requirement is much lower than the minimum 620 credit score requirement for a conventional loan.
- Lower down payment: FHA loans allow you to make a 3.5% down payment, and you may qualify for down payment assistance programs from your state housing financing agency.
- Open to all applicants: Department of Veterans Affairs (VA) loans require proof of military service. U.S. Department of Agriculture (USDA) loans require borrowers to only purchase homes in eligible rural areas. FHA loans, however, are open to all borrowers, including borrowers who want to purchase a home in cities and rural areas.
- Mortgage insurance premium (MIP): FHA loans require borrowers to pay one-time, upfront MIP and annual MIP, which adds to the long-term cost of borrowing.
- Tougher appraisal process: A lender usually requires an appraisal before you can buy a home. With FHA loans, you must use an FHA-approved appraiser. FHA-approved appraisers are harder to find, and the standards for FHA appraisals are typically more stringent than conventional mortgage appraisals.
- Higher interest rates: FHA loans offer competitive interest rates for your credit score, but the rates may be higher than conventional loan rates for borrowers with higher credit scores.
Hereâs another factor to consider: FHA loans limit the amount of money you can borrow. FHA loan limits are determined by the county where a property is located and divided into low-cost and high-cost counties. Here are the FHA loan limits for 2023:
|
 |
Low-Cost County |
High-Cost County |
|---|---|---|
|
1-Unit Home |
$472,030 |
$1,089,300 |
|
2-Unit Home |
$604,400 |
$1,394,775 |
|
3-Unit Home |
$730,525 |
$1,685,850 |
|
4-Unit Home |
$907,900 |
$2,095,200 |
The limits for conventional loans are higher. For example, In a low-cost county, the conventional loan limit ranges from $726,200 for a one-unit home to $1,396,800 for a four-unit home. In high-cost counties, the FHA loan limits are the same as the conventional loan limits, but the property values are higher, so borrowers may need to save for a larger down payment or borrow more money to purchase a home.
See What You Qualify For
To buy a multifamily property with a maximum of four units, you must apply for an FHA residential loan. Technically, this is still considered a single-family property under HUD guidelines, but multiple families can live in the separate units.
To qualify for FHA financing and fulfill its primary residence requirement, the borrower must live in at least one of the propertyâs units and can rent out the remaining units.
Living in the property youâre renting out, also known as house hacking, can be a financially savvy way to get started with real estate investing â but itâs not for everyone. Youâll need to factor in your goals and needs before trying this strategy. Â
WATCH THIS Before Buying Your First Multifamily Rental Property with an FHA Loan!
FAQ
Can you use FHA to buy a multifamily home?
What is the debt to income ratio for a FHA multifamily loan?
Can I build a duplex with an FHA loan?
Can I buy a 2nd home with an FHA loan?
What is a FHA multifamily loan?
A Federal Housing Administration (FHA) multifamily loan allows borrowers and real estate investors to buy a multifamily home, which is defined by the FHA and other mortgage investors as a property that has 5 units or more. Homes with up to 4 units are considered single-family housing, so those properties wouldn’t qualify for this type of loan.
Can you buy a multi-family property with an FHA loan?
The FHA loan program is for buyers purchasing a primary residence. So, if a buyer is planning on living in one unit, they might qualify for an FHA loan. Here are some requirements for purchasing a multi-family property with an FHA loan: Borrower must live in the property for a minimum of one year as a primary residence.
Can I get an FHA multifamily loan for owner-occupiers?
When it comes to FHA multifamily loans for owner-occupiers, it is important to note that these loans are not limited to individuals purchasing their first homes. Even if you already own a home, you can still qualify for an FHA multifamily loan if you plan to live in one of the units as your primary residence.
Can I buy a multiunit property with an FHA loan?
Using an FHA loan to buy a multiunit property can be a great option for those looking to become a landlord for the first time, since they allow for a low down payment and come with low interest rates as compared to many other loan types. However, the home must be owner-occupied and cannot contain more than four units.
Can you buy a multi-unit home with a FHA down payment?
After all, the FHA down payment requirements and FICO score rules are the same whether you are buying a single-unit home as a starter home or when purchasing a property with as many as four living units. The FHA loan rules for purchasing a multi-unit property as a first-time home buyer or experienced homeowner can be found in HUD 4000.1.
Can you get a FHA loan on a single-family home?
Single-family homes are not the only available option. FHA loans are also available on duplexes, triplexes, and even quads. A quad (or quadplex) is a property with four separate living units. Each living unit could be a two-bedroom apartment, for instance.