How To Get Approved For An FHA Loan To Buy A Fourplex

Getting approved for an FHA loan to purchase a fourplex can be a great way to become a real estate investor while also living in one of the units. With an FHA loan, you only need a 3.5% down payment and flexible credit and income requirements. This makes it one of the most accessible loan programs for first-time homebuyers looking to get their foot in the door with rental properties.

In this comprehensive guide, we’ll walk through everything you need to know about getting approved for an FHA loan for a fourplex, from eligibility requirements to the step-by-step process.

Overview of FHA Loans for Fourplexes

The Federal Housing Administration (FHA) is a government agency that provides mortgage insurance on loans made by FHA-approved lenders. This mortgage insurance protects the lender in case the borrower defaults on the loan.

FHA loans allow borrowers to purchase a 1-4 unit residential property with low down payments and flexible qualifying guidelines. For a fourplex, the FHA requires that you occupy one of the units as your primary residence. The other units can be rented out to generate rental income.

Some key advantages of FHA loans for fourplexes include

• Low down payment – Only 3.5% required
• Flexible credit – Minimum 580 FICO score
• Gift funds allowed – Can use gifts from family for down payment
• No income limits – Your income doesn’t have to be below a certain amount
• Low mortgage insurance – 1.75% upfront, 0.45-0.85% annually

The FHA insures loan amounts up to $970,800 depending on the county limits where the property is located. The maximum FHA loan amount for a fourplex is typically higher than for a single-family home.

FHA Loan Requirements for Fourplexes

While FHA loans offer flexible qualifying guidelines, you still need to meet certain eligibility standards. Here are the key requirements to get approved for an FHA loan for a fourplex:

Credit Score – At least 580 FICO for 3-4 unit properties. The higher your score, the better your interest rate.

Debt-to-Income Ratio – Your total DTI must be below 43%. FHA calculates DTI based on your gross monthly income.

Down Payment – Minimum 3.5% down required. Can come from your own funds, gifts, grants, etc.

Occupancy – You must live in one of the units as your primary residence for at least 1 year.

Property Type – The fourplex must be an existing residential property or have been completed more than 1 year ago.

Loan-to-Value – Max loan amount is 96.5% of appraised value.

Mortgage History – Current on all mortgage payments last 12 months if you own other properties.

Self-Sufficiency Test – Fourplex must generate enough rental income to cover PITI by at least 15%.

Appraisal – Fourplex must meet FHA minimum property standards and appraise for at least purchase price.

Landlord Experience – Not required but helps. Provide leases if currently rented.

First-Time Homebuyer – FHA loans work for both first-time buyers and repeat buyers.

As you can see, FHA loans offer more flexible approval guidelines than conventional mortgages. This allows more buyers to qualify.

The FHA Loan Process for a Fourplex

Now let’s walk through the typical process of getting approved for an FHA loan for a fourplex:

1. Get Pre-Approved

Work with an FHA lender to get a pre-approval letter before making offers. This shows sellers you can get financing.

2. Find a Fourplex

Search for a 1-4 unit residential property, condo, townhouse, etc. Hire a good real estate agent experienced with investment properties.

3. Make an Offer

Make an offer and negotiate the purchase price and terms with the seller.

4. Enter Escrow

Once your offer is accepted, open escrow and provide earnest money deposit.

5. FHA Appraisal Ordered

Your lender will order an FHA appraisal. Appraiser will ensure property meets guidelines and provide fair market rent estimates.

6. Submit Documentation

Provide documents verifying your income, assets, and rental income on other properties owned.

7. Conditional Approval

The lender will underwrite your loan and issue loan conditions that must be satisfied.

8. Final Approval

Once all conditions are cleared, the lender issues final approval.

9. Closing Day

Review final closing disclosure. Sign loan documents and receive keys!

The entire process usually takes 30-60 days from start to close. Be sure to communicate regularly with your loan officer throughout.

Using Rental Income to Qualify

One of the biggest advantages of FHA loans for fourplexes is the ability to use future projected rental income to help you qualify for the mortgage.

Here are some key facts on counting rental income with an FHA loan:

• 75% of fair market rent – FHA only allows you to count 75% of the appraiser’s estimated market rent for each unit when calculating your income. This accounts for vacancies.

• Two options – Either collect signed leases from new tenants, or use the FHA rent schedule method which simply requires comps of rents in the area.

• Future rent counts – Even if the units aren’t already occupied, you can use rents you could reasonably expect to receive after purchase.

• Must meet self-sufficiency – For a fourplex, the monthly rental income must total at least 115% of the mortgage payment.

• Experienced or first-timer – FHA allows rental income whether you’re an experienced or brand new landlord. Conventional loans require a history of managing rental properties.

• Get specialist help – Working with a loan officer experienced in FHA investment loans is key to ensuring rental income is calculated and documented properly.

The ability to count potential rental income in your DTI ratio makes it easier to qualify and can maximize your borrowing power. Just be sure you can actually get the rents used – the appraiser will estimate realistic amounts.

Fourplex Self-Sufficiency Test

A unique FHA guideline for three- and four-unit properties is something called the “self-sufficiency test.”

The test requires that:

The projected monthly rental income minus 25% for vacancies and maintenance must total at least 115% of the expected monthly mortgage payment (PITI).

This ensures the rental income is sufficient to cover ownership costs in case you have periods of vacancy.

For example, say your PITI payment on a fourplex will be $2,000 per month. After subtracting 25%, the monthly rental income must be at least $2,300 to meet the 115% threshold.

This test applies to all FHA loans for three- and four-unit properties. The rental income is calculated using 75% of market rents determined by the appraiser.

Fourplex FHA Loan Limits

The maximum FHA loan amount you can borrow depends on FHA mortgage limits, which vary by county. Higher cost areas have higher limits.

Here are the current baseline nationwide FHA loan limits:

• 1-unit – $970,800
• 2-unit – $1,243,050
• 3-unit – $1,476,750
• 4-unit – $1,930,150

So for a fourplex, you can borrow up to $1,930,150 in most areas. Specific limits for each county can be found on FHA.com.

High-balance FHA loans up to $1.5 million may also be available if allowed for that county.

The good news is FHA loan limits are generous enough to buy most fourplexes except luxury properties. You can maximize your borrowing power and buy a more expensive building than possible with a conventional mortgage.

Ensuring It’s a Legal Fourplex

When purchasing a fourplex with FHA financing, the lender will require evidence it is a legal residential structure before approving the loan.

Illegal converted properties with unpermitted additions or extra units can’t be financed with an FHA loan.

Here are some tips for verifying your fourplex is legal:

• Review the certificate of occupancy to confirm the total legal number of units.

• Check public records for building permits showing legal conversions.

• Ask the seller to provide permits, zoning records, and other documentation.

• Drive through the neighborhood and look for other similar multi-unit buildings.

• Have your real estate agent pull title records to check for covenants prohibiting multi-unit properties.

• Thoroughly inspect each unit during appraisal and make sure they have full, separate amenities.

Taking these steps upfront prevents headaches later in the transaction if the property ends up being disqualified by the lender.

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