Can You Get an FHA Loan on a Commercial Property?

The FHA (Federal Housing Administration) is well known for backing residential mortgages that make homeownership more affordable But some types of commercial properties may also qualify for FHA-insured financing under certain circumstances. So, can you get an FHA loan on a commercial property?

The short answer is yes, you can get an FHA loan for some commercial properties, but there are strict requirements. The FHA offers financing for apartment buildings, assisted living facilities, nursing homes and other multifamily housing projects aimed at providing affordable housing.

However, the FHA does not provide financing for typical commercial real estate like retail stores, restaurants, warehouses or office buildings FHA loans are only available for properties that are primarily residential in nature and meet their specific eligibility guidelines

Let’s take a deeper look at when and how you can use FHA financing to buy a commercial property.

FHA Loan Programs for Multifamily Properties

The main FHA loan programs that allow financing for commercial real estate are:

• Section 207/223(f) – These loans can be used to purchase or refinance existing apartment buildings with 5 or more units. The apartments must be completed and occupied for at least 3 years.

• Section 221(d)(3) and 221(d)(4) – These programs provide financing for new construction or substantial rehabilitation of multifamily rental housing with 5 or more units. Both nonprofit and for-profit developers can use these loans.

• Section 202 – Provides financing for nonprofit developers to create rental housing for low-income elderly residents aged 62 and older.

• Section 811 – Helps nonprofit developers create affordable rental housing for disabled residents.

These FHA loans offer favorable terms like low down payments and 35-40 year loan terms. They make it possible to provide quality affordable housing that might not otherwise get built.

FHA Loan Rules for Mixed-Use Properties

The FHA will also insure mortgages for mixed-use properties in certain cases:

• The property must be in an area zoned for both commercial and residential use.

• At least 51% of the floor space must be residential. Only 49% or less can be commercial.

• The commercial use must be subordinate to the residential use.

• The borrower must occupy the property as their primary residence for at least 1 year.

For example, a property could have a retail shop on the first floor and apartments above. Or the first floor might be professional office space with the owner living in a residential unit upstairs.

These rules ensure that FHA financing is used for primarily residential properties that also happen to have some commercial space.

Benefits of FHA Loans for Commercial Real Estate

FHA loans offer some advantages for financing commercial real estate projects:

• Low down payments – FHA loans only require a 3.5% down payment from the borrower. This helps make projects more feasible.

• Longer loan term – FHA insured loans can have terms up to 40 years. This results in lower monthly payments compared to conventional loans.

• Low mortgage insurance – FHA loans require monthly mortgage insurance premiums, but rates are lower than with conventional loans.

• Assumable financing – FHA multifamily loans can potentially be assumed by a new buyer if the property is sold. This can help facilitate transfers.

• High loan limits – The FHA insures larger loan amounts in high cost areas compared to conforming conventional loans.

• Less stringent criteria – The FHA may be more flexible than conventional lenders when it comes to the property’s age or condition.

Using FHA financing can help developers undertake projects that otherwise would not be economically feasible. These loans fill a critical gap in the market.

Commercial Properties That Don’t Qualify for FHA Loans

While the FHA does offer financing options for some commercial real estate, there are still properties that do not qualify:

• Retail stores, restaurants, gas stations or convenience stores
• Hotels, motels or other hospitality properties
• Self storage facilities
• Industry or manufacturing buildings
• Office buildings
• Warehouses
• Any other fully commercial uses without a residential component

You cannot get FHA financing for a purely commercial building that does not involve housing. The FHA multifamily loan programs focus specifically on increasing the supply of affordable rental housing.

How to Get an FHA Loan for a Commercial Property

If you’re interested in getting an FHA insured loan for an eligible commercial property, follow these steps:

• Find an approved lender – You’ll need to work with a lender that has been approved by HUD to originate FHA multifamily loans. Not all lenders have this approval.

• Choose the right program – Work with your lender to select the appropriate FHA loan program based on your project plans. Each program has specific eligibility rules.

• Submit your application – Your lender will help you gather all the required documentation and submit the full application to the FHA for approval.

• Complete the process – After securing the FHA commitment, work with your lender to finalize the loan and close on your commercial property purchase or refinance.

The process is more complex than getting a standard home mortgage. But FHA programs open up financing options for certain commercial properties that aim to provide affordable housing. With proper planning and advice from approved lenders, you may be able to use FHA insured financing to achieve your commercial real estate goals.

Key Takeaways

• FHA loans can be used for some multifamily housing projects like apartment buildings, assisted living, etc. They cannot finance regular commercial real estate.

• Mixed-use properties with both residential and commercial space may qualify if at least 51% of the floor space is residential.

• Benefits include low down payments, longer loan terms, and assumable financing.

• Retail, hospitality, office and industrial properties do not qualify for FHA loans.

• Work with an approved lender familiar with FHA multifamily loan programs if you want to buy an eligible property.

The FHA provides a narrow but important financing avenue for certain affordable housing developments that contain some commercial space. With proper planning and advice, FHA loans can potentially help you acquire multifamily and mixed-use commercial properties in many cases.