Getting an FHA loan for a duplex can be a great way for first-time homebuyers to enter the real estate market. With an FHA loan you may be able to buy a duplex with as little as 3.5% down while living in one unit and renting the other.
However there are some specific requirements you need to meet to qualify for an FHA loan on a duplex property. In this comprehensive guide, we’ll walk through everything you need to know about using FHA financing to purchase a duplex, including
- What is an FHA loan?
- FHA loan requirements for duplexes
- Down payment and mortgage insurance
- Occupancy requirements
- Credit score and debt-to-income requirements
- Loan limits
- The pros and cons of an FHA duplex loan
Let’s get started!
What is an FHA Loan?
An FHA loan is a government-backed mortgage insured by the Federal Housing Administration (FHA). Key features include:
- Low down payment requirements – As low as 3.5% down
- More flexible credit standards than conventional loans
- Access to low mortgage insurance rates
- Lower minimum credit scores required
These features make FHA loans ideal for first-time homebuyers and buyers with lower incomes or credit scores. With an FHA loan, you may have an easier time qualifying for financing even if you can’t make a large down payment.
FHA Loan Requirements for Duplexes
You can use an FHA loan to purchase a duplex, triplex, or fourplex property in which you plan to occupy one of the units. All FHA loans come with certain baseline requirements, along with some additional specific duplex loan requirements.
Down Payment
To qualify for the lowest down payment of 3.5%, you’ll need a credit score of at least 580. With a score between 500-579, you can still qualify but will need at least 10% down.
Gift funds and grants can also be used for your down payment when getting an FHA duplex loan.
Mortgage Insurance
FHA loans require mortgage insurance, which protects the lender in case you default. For a duplex, the annual mortgage insurance premium is 0.80% – 1.05% of the loan amount.
You pay this as part of your monthly mortgage payment. Mortgage insurance is required for the life of the loan on duplex properties.
Occupancy Requirements
To get approved with FHA financing, you’ll need to be the owner-occupant in one of the units. This holds true for duplexes, triplexes, and multi-family properties up to four units.
Note: If you’re looking to buy a multi-family property with five units or more, it’s considered commercial property.
You must intend to live in the property for at least 12 months. Renting out all units right away or pretending to occupy a unit when you won’t actually live there constitutes mortgage fraud.
Credit Score Requirements
As mentioned above, you’ll need a credit score of 500 or higher to qualify for an FHA loan. Many lenders require minimum scores of 580-640 for approval. The higher your score, the better your interest rate and overall loan terms will be.
Make sure to check your credit reports ahead of time so you have time to correct any errors before applying.
Debt-to-Income Ratio
Your front-end debt-to-income ratio (DTI) can be as high as 55% with compensating factors. Without compensators, the max DTI is typically 50%.
Your back-end DTI, including all monthly debts, should not exceed 43%. Work on paying down debts and limiting new credit inquiries to help keep your DTI low.
Loan Limits
FHA loan limits vary by county but range up to $970,800 for high-cost areas in 2022. Duplex properties have higher limits than single-family homes. Verify the current FHA loan limit for your county.
The Pros and Cons of an FHA Duplex Loan
Let’s summarize some of the key advantages and potential disadvantages of using FHA financing for a duplex:
Pros
- Low 3.5% down payment requirement
- Gift funds can be used for down payment
- Lower credit scores accepted
- Higher debt-to-income ratios allowed
- Lower mortgage insurance rates than conventional loans
- Higher loan limits for duplexes
Cons
- Must occupy as owner for at least 12 months
- Mortgage insurance is required for life of loan
- Total interest costs may be higher than conventional loan
- Must meet stricter property requirements
While FHA duplex loans offer more flexibility, conventional loans may offer lower rates and let you rent out both units immediately. Shop around to see whether an FHA or conventional loan better suits your needs.
Tips for Getting Approved for an FHA Duplex Loan
If you want to improve your chances of getting approved for an FHA loan on a duplex property, keep these tips in mind:
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Get your credit score above 580 – This qualifies you for the lowest down payment. The higher your score, the better.
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Lower your DTI – Pay down debts and limit new inquiries. Stay under 50% front-end DTI.
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Save for a down payment – Shoot for at least 3.5% of the purchase price.
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Find an owner-occupied duplex – It must have at least two units with one for you to live in.
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Compare multiple lenders – Rates, fees, and requirements can vary.
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Document funds and income – Have bank statements, W-2s, and paystubs ready.
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Get pre-approved – This shows sellers you’re serious. But don’t apply too early as new credit inquiries can lower your score.
Alternatives to an FHA Duplex Loan
If you don’t qualify for an FHA loan or want to rent out both units right away, here are a couple alternatives to consider:
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Conventional 97 Loan – You can buy a duplex with just 3% down by going through Fannie Mae or Freddie Mac. Credit and income requirements are stricter than FHA.
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USDA Loan – For properties in rural areas, USDA loans offer 0% down payment options for low-to-moderate income borrowers. Credit and income limits apply.
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VA Loan – If you or your spouse served in the military, a VA loan allows 0% down on a duplex while occupying one unit. Credit and income still factor in.
Be sure to discuss all your mortgage options with a loan officer. They can help you choose the most fitting loan type and lender for your situation.
The Bottom Line
Yes, you can absolutely get approved for an FHA loan on a duplex! Just be sure to meet all the FHA requirements in terms of your down payment, credit score, debt-to-income ratios, and occupancy status in one of the units.
FHA duplex loans provide a great opportunity for first-time homebuyers to enter the market and start building equity. The low down payment and flexible credit guidelines help make financing achievable even with limited funds and less-than-perfect credit.
Just be sure to shop around and compare quotes from multiple lenders. Look for low rates and reasonable fees to maximize your savings. If you’re organized with your paperwork and finances, getting approved for an FHA duplex loan can be a smooth process!
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
FAQ
Will an FHA loan cover a duplex?
Can you use an FHA on a multifamily property?
Can I buy a 4 plex with an FHA loan?
What credit score do I need to buy a duplex?
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 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 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 buy a multifamily home with an FHA loan?
You may not purchase an actual investment property with an FHA loan. However, you can collect rental income on any other units in the multifamily home. You can not rent out all of the units though. You must use one as your primary residence. Can I use down payment assistance on a 2-4 unit property?