fha loan for 4 plex

The Complete Guide to Getting an FHA Loan for a 4-Plex

Buying a 4-plex with an FHA loan can be a great way to get started in real estate investing. With an FHA loan, you only need a 3.5% down payment to purchase a 4-unit property. This allows you to get into a larger investment property without a huge cash outlay.

In this comprehensive guide, we will cover everything you need to know about getting an FHA loan for a 4-plex, including:

• FHA Loan Overview
• Benefits of Buying a 4-Plex
• FHA Loan Requirements
• Using Rental Income to Qualify
• The FHA Self-Sufficiency Test
• FHA 4-Plex Loan Limits
• Finding a 4-Plex Property
• The Loan Process
• Tips for Success

Let’s get started!

FHA Loan Overview

FHA loans are government-backed mortgages insured by the Federal Housing Administration (FHA). They offer low down payments and flexible qualifying guidelines.

While FHA is best known for helping first-time homebuyers, they also offer investment property loans. You can purchase a 1-4 unit property with an FHA loan as long as you live in one of the units.

The benefits of an FHA loan for real estate investors include:

• Low 3.5% Down Payment
• Less Strict Debt-to-Income Ratios
• Lower Credit Score Requirements
• Use of Expected Rental Income

This makes FHA loans ideal for buying a 4-plex, especially if you don’t have a lot of cash or don’t quite meet conventional loan standards.

Benefits of Buying a 4-Plex

There are many good reasons to purchase a 4-plex, including:

• Leverage: With only 3.5% down, you get control of a much larger asset.
• Cash Flow: Rental income from 3 units can cover most or all of your mortgage payment.
• Appreciation: As the property value increases over time, you earn more equity.
• Tax Benefits: Expenses like maintenance, utilities and mortgage interest are tax deductible.
• Tenant Income: Renters pay down your mortgage instead of you paying a landlord.
• Force Savings: Your tenants build equity in the property for you each month.
• Landlord Experience: Managing a 4-plex builds skills for acquiring more properties.

In short, buying a 4-plex with an FHA loan sets you up nicely on the path to real estate wealth.

FHA Loan Requirements

While FHA offers flexible guidelines, you still must meet certain criteria to qualify for a 4-plex mortgage. Here are the key requirements:

• Credit Score: At least 580 FICO for 3.5% down. The higher your score, the better.

• Debt-to-Income Ratio: Your total monthly debt payments, including the new mortgage, cannot exceed 43% of your gross monthly income.

• Cash Reserves: For a 4-plex, you’ll need at least 3 months of PITI (principal, interest, taxes, insurance) reserves after closing.

• Downpayment: Minimum 3.5% down. Can come from your own funds, gifts, grants, etc. The seller cannot contribute to your down payment.

• Occupancy: For an FHA loan, you must move into one of the 4 units within 60 days and live there for at least 12 months.

As you can see, FHA has relatively low barriers to entry compared to conventional loans. This gives first-time investors a chance to buy their first small multifamily property.

Using Rental Income to Qualify

A major bonus with FHA is you can use expected future rental income to qualify, even if you don’t already have experience as a landlord. This additional income can help you meet the DTI requirements.

Here are the guidelines around using rental income with an FHA loan:

• Have an appraisal done to determine fair market rental rates for each units.

• Provide copies of current leases if any units are occupied.

• Use the lesser of:

  • 75% of fair market rent determined by appraisal

  • 75% of current rent per existing leases

• Add up the rental income totals for all units, minus the 25% vacancy factor.

• Include the rental income in your total qualifying income.

Having 3 units of rental income in the mix makes it much easier to qualify for an FHA 4-plex mortgage.

The FHA Self-Sufficiency Test

FHA requires that a 4-unit property generate enough rental income to cover the full monthly mortgage payment. This is known as the self-sufficiency test.

They require this test to ensure you can still afford the mortgage if you have a vacancy. A lender will calculate if your expected rents pass this bar based on the appraisal and your actual mortgage payment amount.

Run this FHA self-sufficiency calculator to see if a property you’re considering will pass the test.

FHA 4-Plex Loan Limits

In expensive housing markets, FHA sets higher loan limits for 2-4 unit properties. For a 4-plex in 2023, here are the FHA loan limits:

• Low-Cost Areas: Up to $954,225

• High-Cost Areas: Up to $1,581,750

• Special Exception Areas Like LA & New York City: Up to $2,852,550

You can look up the exact limit for any county using HUD’s FHA loan limits tool.

Finding a 4-Plex Property

Searching for the right 4-plex to purchase takes time and diligence. Here are some tips:

• Hire a savvy real estate agent who specializes in small multifamily properties.

• Look for 4-plexes in up-and-coming neighborhoods near amenities like public transit.

• Drive through target areas to spot “For Sale by Owner” signs. Many 4-unit buildings sell directly from the landlord.

• Search property records to find the owners of 4-plexes, then send them letters expressing your interest in buying.

• Join a local real estate investors association to gain access to off-market 4-unit deals.

• Look for distressed properties, short sales, and foreclosures selling under market value.

• Consider buying a triplex and converting one larger unit into two 1-bedroom units to create a 4-plex.

Take your time shopping around to find a 4-plex that meets your investment objectives.

The FHA 4-Plex Loan Process

Once you find a 4-plex you want to purchase, here is the general FHA loan process:

1. Get pre-qualified – A lender will look at your income, credit score, debts, and cash to determine the loan amount you may qualify for.

2. Make an offer – Submit an offer contingent upon securing financing and property appraising for at least the purchase price.

3. Get fully approved – The lender will verify all your details and ensure you meet FHA requirements.

4. Inspections – Schedule a professional home inspection to uncover any defects or safety issues.

5. Appraisal – The lender’s appraiser will estimate the property’s fair market value and provide market rent assessments.

6. Underwriting – FHA will review your full loan application and issue final approval.

7. Closing – You’ll sign all your loan documents and transfer funds.

8. Move in – You must occupy one unit within 60 days of closing.

9. Rent units – Clean up any vacant units, list them for rent, and start collecting payments from tenants.

The entire purchase process usually takes 30-60 days from start to finish.

Tips for Success with an FHA 4-Plex

Follow these tips to make sure your FHA 4-plex purchase goes smoothly:

• Find an experienced FHA lender who can walk you through each step.

• Hire a property manager or learn landlord duties like maintenance, screening applicants, and following landlord-tenant laws.

• Set aside at least 6 months of PITI payments in reserves in case of vacancies.

• Be conservative when determining rental income. Don’t inflate numbers.

• Run the numbers to be sure the property cash flows well. Don’t ignore expenses.

• Inspect units carefully for defects that may need repairs after closing.

• Have a clear plan to build wealth through your 4-plex over time. Don’t attempt to “flip” it quickly.

• Speak with a tax professional about the many tax benefits available to 4-plex owners.

With proper preparation and planning, an FHA loan can be a powerful tool to acquire your first small multifamily investment property.

The Bottom Line

Buying a 4-plex with an FHA loan allows investors to purchase a nice sized property with a low 3.5% down payment. With the ability to use expected rent from 3 units to qualify, this opens the door to those with good credit but limited funds.

Be sure to consult the FHA guidelines closely and work with an experienced lender and agent. Get your financing lined up, make an offer on the