Buying a 4-Plex With an FHA Loan: A Complete 2024 Guide

Investing in real estate is an excellent way to build wealth over time, And one of the best strategies for new investors is to “house hack” by buying a small multifamily property with an FHA loan

An FHA loan allows you to purchase a 1-4 unit property with just 3.5% down. This lets first-time homebuyers purchase a duplex triplex or 4-plex, live in one unit, and rent the other units to cover most or all of the mortgage payment.

In this comprehensive guide we’ll cover everything you need to know about using an FHA loan to buy a 4-plex including

What is an FHA 4-Plex?

An FHA 4-plex refers to a 4-unit residential property financed with an FHA loan. FHA allows borrowers to purchase 1-4 unit properties as long as they live in one of the units as their primary residence for at least one year.

The property must meet FHA guidelines regarding condition, appraised value, and loan limits. But otherwise, the loan process is similar to buying a single-family home.

Benefits of Buying a 4-Plex With FHA

There are several advantages to purchasing a 4-plex with an FHA loan versus other property types or loan programs:

• Low Down Payment: FHA requires just 3.5% down on 1-4 unit properties. With a conventional loan, you’d need 15-25% down to buy a 4-plex as an investment property.

• Use Rental Income to Qualify: You can use 75% of projected rents from vacant units to help you qualify for the loan. This additional “income” can make it easier to get approved.

• Live for Free or Profit: With 3 rental units, it’s possible to cover your entire housing payment and expenses. Or you may cash flow several hundred dollars per month.

• Build Landlord Experience: Being an owner-occupant landlord helps you gain experience managing tenants and properties.

• Tax Benefits: You can deduct mortgage interest, property taxes, maintenance, utilities, and other rental property expenses.

• Appreciation and Equity: As the property appreciates and you pay down the loan, you build net worth.

• Leverage: You control a more valuable asset with a small down payment. As values rise, your return on investment increases.

In short, buying a 4-plex with FHA gives first-time investors unique advantages hard to find with other options.

FHA 4-Plex Guidelines

When buying a 4-unit property with FHA, you must meet all the standard FHA loan requirements:

• Credit Score: 580+
• Downpayment: 3.5%
• Debt-to-Income Ratio: Below 56.9%
• Loan-to-Value Ratio: Up to 96.5%
• Mortgage Insurance: 1.75% upfront, 0.55% annual
• Occupancy: Owner-occupied in 1 unit
• Property Condition: Must meet FHA standards

In addition, there are a few special requirements for FHA loans on 3-4 unit properties:

• Reserves: You must have at least 3 months’ worth of mortgage payments in reserves after closing. For a $2,000 payment, you’d need $6,000 in leftover cash.

• Self-Sufficiency Test: Projected rents must cover the full monthly mortgage payment using a 75% vacancy factor. If rents don’t cover the payment, you can’t use FHA.

• Ineligible Properties: Co-ops and manufactured homes with 2 or more units are not eligible.

• Loans Limits: Range from $625k-$2.1M+ depending on location and number of units.

As long as you meet these parameters, you can use FHA financing to buy a 4-plex just like you would a single-family residence.

How to Buy a 4-Plex With FHA

Follow these steps to purchase a 4-unit property with an FHA loan:

1. Get Pre-Approved

   Work with a lender that offers FHA multifamily loans. They will assess your eligibility based on your credit, income, debts, and downpayment funds.

2. Find a Property

   Search for a 4-plex in your target area. Hire a knowledgeable real estate agent to help you locate good options. View properties to assess condition, rents, neighborhood, etc.

3. Make an Offer

   Once you find a suitable 4-plex, make an offer to the seller. Submit your pre-approval letter and earnest money deposit with the purchase agreement.

4. Conduct Due Diligence

   Order a home inspection to uncover any major defects. Review leases and financials like rent rolls and operating expenses. Ensure rents satisfy FHA self-sufficiency test.

5. Get Appraisal and Final Approval

   Your lender will order an appraisal to confirm the property’s value. The appraisal also estimates market rents. Submit any other needed documentation for underwriting.

6. Close on the Property

   At closing, you’ll sign final loan documents and take ownership. Bring your downpayment and closing costs to complete the transaction.

7. Move In and Rent Out Units

   Occupy one unit as your primary residence. Rent the other three units to qualified tenants. Collect rents to pay down your mortgage.

Follow this process and you’ll be well on your way to owning your first investment property with an FHA 4-plex loan!

Pros and Cons of Buying 4-Plex with FHA

Let’s recap the main advantages and potential drawbacks of purchasing a 4-unit building with an FHA loan:

Pros

• Low 3.5% downpayment
• Easier to qualify using rental income
• Generate enough rent to cover entire housing payment
• Start investing in real estate with small upfront investment
• Build hands-on landlord experience
• Income + appreciation = faster wealth building

Cons

• Higher monthly costs if you can’t rent all units
• More responsibility as a landlord
• Potentially costly maintenance and repairs
• Harder to sell than single family home
• Self-sufficiency test limits financing options

For the right borrower, the pros generally outweigh the cons when buying a small multifamily property owner-occupied property. But consider both carefully before deciding.

Alternatives to FHA 4-Plex Loan

An FHA loan is just one option for financing a 4-unit building. Here are a few other choices to consider:

• Conventional Loan – Typically requires 20-25% down to buy a 4-plex as a rental. But you may be able to put as little as 5% down in some cases if you live on-site.

• Portfolio Loan – A bank or lender may offer a “portfolio” investment property loan with 10-20% down and no occupancy required.

• Seller Financing – In some cases, the seller may finance the purchase directly if you can’t obtain bank financing.

• Partners – Team up with other investors and buy a larger multifamily property using an investment loan.

• Hard Money – A short-term private loan using the property as collateral. Higher rates but easier to qualify.

Look at all your options and run the numbers to see what works best for your situation. But for many first-time investors, FHA offers the right mix of low down payment, flexible guidelines, and owner-occupancy perks.

Is Buying a 4-Plex Right for You?

While purchasing a 4-unit building with FHA can be a great way to start investing in real estate, make sure it aligns with your goals and abilities. Ask yourself:

• Can I afford the payments if I don’t rent all units right away?
• Am I prepared for the responsibility and work of being a landlord?
• Do I plan to manage the property myself or hire a manager?
• How long do I plan to live on-site before moving out and renting all units?
• Does the area have strong rental demand and cash flowing 4-plexes?

If you run the numbers and like the long-term prospects, have enough money for maintenance costs, and are excited to manage your own tenants, an FHA 4-plex could be an excellent fit. But carefully weigh the pros and cons before jumping in.

Final Thoughts

For prospective real estate investors, buying a 4-plex with an FHA loan can be a great way to get started. The low down payment lets you start investing and build equity with less cash than purchasing a single family rental. And you can use rental income to qualify while gaining first-hand landlord experience.

Just be sure to budget for vacancies, screen tenants carefully, learn landlord-tenant laws, and have a long-term perspective. Patience and hard work can lead to a profitable 4-plex investment property over time.

Connect with an experienced lender to explore your FHA 4-plex purchase options today. They