Many people wonder if they can use an FHA loan to get their feet wet as a landlord, earn rental income, reduce primary residence expenses, and start investing in real estate.
FHA loans allow you to buy a duplex, triplex, or four-plex (2-4 unit) property as long as you live in one unit. You can rent out the remaining units.
And for the most part, the same FHA lending rules apply for multi-unit properties as for single-family residences.
How To Use An FHA Loan To Buy a FourplexBuying a fourplex with an FHA loan can be a great way to get started in real estate investing. With an FHA loan, you can purchase a 1-4 unit property with just 3.5% down payment. This allows you to buy a larger investment property than you could likely afford if buying a single family home.
An FHA loan for a fourplex offers several advantages:
- Low down payment of 3.5%
- Use future rental income to qualify even with no landlord experience
- Purchase the property for yourself and live in one unit as your primary residence
- Hire a property manager or self-manage and collect rental income from the other units to help pay the mortgage
However, financing a fourplex does come with some additional requirements and costs compared to financing a single family residence. In this article, we’ll break down everything you need to know about getting an FHA loan for a fourplex.
What is an FHA Loan?
FHA stands for Federal Housing Administration. The FHA insures loans made by approved lenders, protecting lenders from losses if a borrower defaults. This allows lenders to offer mortgages to buyers who may not qualify for conventional loans with tighter requirements.
To qualify for an FHA loan you’ll need
- Credit score of 580 or higher
- Debt-to-income ratio below 56.9%
- 3.5% down payment
FHA loans can be used to purchase or refinance primary residences, second homes, and investment properties with up to 4 units.
FHA Loan Requirements for a Fourplex
The FHA has specific requirements when financing fourplexes Here are the key criteria to be aware of
Down Payment
- 3.5% down payment required
- Down payment funds can be from your own savings, gifts, grants, etc.
Credit
- Minimum credit score of 580
- Clean recent credit history
Income
- Stable income from employment or other sources
- Use future projected rental income from 75% of appraised market rents to qualify
Property
- Must be zoned for multifamily use
- Each unit must have own kitchen and bathrooms
- Must pass FHA quality inspection
Reserves
- 3 months reserves required after closing for 4 unit properties
Occupancy
- You must occupy one unit as your primary residence
Mortgage Insurance
- Upfront MIP of 1.75% of loan amount
- Annual MIP of 0.55% of loan amount
Loan Limits
- Vary by county, up to $958,350 for a 4 unit property in 2022
Debt-to-Income
- Maximum backend DTI of 56.9%
First-Time Home Buyer
- You don’t have to be a first-time buyer
Be sure to connect with an FHA lender early in the process to determine if you meet all the requirements.
The FHA 4-Unit Self Sufficiency Test
A key additional requirement for 3-4 unit properties is meeting the FHA self-sufficiency test. This ensures the rental income is sufficient to pay the mortgage and expenses.
Specifically, the test requires:
- Rental income to equal or exceed the PITI (principal, interest, taxes, insurance)
- A 25% vacancy factor is applied to the rental income
For example, if your PITI payment is $2,000 per month, you would need $2,667 in gross rental income to pass the test ($2,000 divided by 0.75).
Run the numbers on any three or four unit property before making an offer to ensure it will pass.
Calculating Rental Income for FHA
Since FHA allows first-time buyers to use rental income to qualify, you’ll need to document the rents. There are two options:
Option 1:
- Provide current lease agreements for occupied units
- Use 75% of lesser of:
- Actual rents per lease agreements
- Market rent determined by appraisal
Option 2:
- If units are vacant, use 75% of market rent estimate from appraisal
Talk to your lender early in the process to determine the rental income that can be used. Provide current leases if possible.
FHA 4 Unit Loan Limits
FHA has higher loan limits for 2-4 unit properties. The maximum FHA loan amount for a 4 unit property is $958,350 in most areas. Higher limits up to around $2.2 million are available in certain high cost counties.
You can look up the FHA loan limits for your county using the FHA mortgage limits tool.
Pros and Cons of an FHA 4 Unit Loan
Pros
- Low 3.5% down payment
- Use future rental income to qualify
- Potentially reduce housing costs by collecting rent
- Live in one unit as your primary residence
- Build real estate investment experience
- Higher loan limits than single family homes
Cons
- Must be owner-occupied in one unit
- Meet strict FHA property requirements
- Vacancy risk if unable to rent units
- More complex process than financing a single family home
- Monthly mortgage insurance premiums
Overall, FHA fourplex loans allow homeowners and real estate investors to purchase a larger investment property than possible for most people with a conventional loan.
Despite the pros, make sure you crunch the numbers and consider risks like vacancies before jumping into a fourplex purchase.
Steps to Buy a Fourplex with FHA
If you’ve decided an FHA loan fourplex is right for you, here is the general process:
1. Get Pre-Approved
Work with an FHA lender to get a pre-approval letter based on your income, credit, and downpayment.
2. Shop for Properties
Once pre-approved, start searching for fourplexes in your target areas. Work with a knowledgable real estate agent.
3. Make an Offer
When you find the right fourplex, submit an offer and open escrow.
4. Conduct Due Diligence
Order an appraisal and inspections during the contingency period. Be sure the rents will meet FHA guidelines.
5. Submit Your Loan File
Provide all required documentation to your lender such as income/employment verification, bank statements, etc.
6. Get Final Approval
The lender will review and underwrite your full loan file and issue a clear to close when final approval is obtained.
7. Close on Your Fourplex
Schedule a closing date, sign documents, then get the keys!
8. Move-In and Rent Out Units
Move into your unit as your new primary residence. Rent out the other three units.
Be sure to work closely with your real estate agent and loan officer throughout the process.
Alternatives to FHA 4 Unit Loans
An FHA loan is just one option for financing small multifamily properties. Here are a few other loans that may work:
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Conventional small multifamily loans – Allows 5% down investment loans on 2-4 unit properties. No owner-occupancy required.
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VA loans – Purchase 2-4 unit properties with 0% down if you are a qualified VA borrower.
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Portfolio loans – Local banks may offer portfolio investment property loans with less stringent requirements than FHA.
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Seller financing – In some cases, seller may finance a fourplex for you if you can’t obtain bank financing.
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Hard money loans – Asset-based loans from private lenders at higher rates if you can’t qualify for other options.
Compare all your options if you are having trouble qualifying for an FHA fourplex loan.
FAQs About FHA Fourplex Loans
Here are answers to some common questions about getting an FHA loan for a fourplex:
Do I have to live in one unit of the fourplex?
Yes, FHA requires you to occupy one unit as your primary residence. After one year, you may move out and rent all units.
How much rental income do I need to qualify?
You can use 75% of market rent or current rents, whichever is lower. Talk to a lender to calculate.
What fourplex expenses are included in the self-sufficiency test?
The test includes PITI – principal, interest, taxes, insurance. No other expenses are considered.
What if one unit is vacant?
Your lender will reduce the usable rental income as if one unit was vacant when qualifying you. Be conservative.
Do I need a big down payment?
No, you only need 3.5% down payment for an FHA fourplex loan.
Who are FHA loans from?
FHA doesn’t directly loan money, but they insure loans from FHA approved lenders.
Is an FHA Loan Right
Is buying a duplex a good idea?
Buying a duplex is a highly personal decision. Make an honest assessment of yourself and your goals to make the right choice.
Here are good reasons to buy a duplex:
- You’re serious about owning rental properties
- You have a steady income stream outside of rental income
- You can afford the full payment if you have to
- You’re in it for the long run
- You want to set yourself up for financial independence one day
Bad reasons to buy a duplex:
- People on social media make it look glamourous
- Your friend did it
- You want to impress people
If you buy a duplex for a “bad reason,” you won’t stick it out in tough times. You’ll lose a lot of money.
Disadvantages of buying a duplex
Buying a 2-, 3-, or 4-unit property comes with drawbacks as well.
- Higher upfront cost: You’ll need a bigger down payment and more for closing costs to buy a multifamily home
- Payment risk: If you can’t rent one unit, you’ll pay more each month without supplemental rental income
- Liability: Whenever you rent real estate to someone, you are at greater risk of lawsuits
- Landlord learning curve: There’s a lot to learn, from maintenance to tenant laws to screening. Learn as much as you can prior to purchasing a duplex
- Harder to sell: It could be harder to sell someday, especially in a down market. Not as many people are looking to buy a duplex as a single-family residence
As with anything worthwhile, there are greater costs and risks. But in a few years, you’ll be glad you took on some extra work and risk.