Purchasing a duplex with an FHA loan can be a great way for first-time homebuyers to get into real estate investing. The low down payment and flexible credit requirements of FHA financing make it feasible for many buyers. If you plan to live in one unit and rent the other, you can qualify for a low down payment FHA loan.
When buying a duplex as your primary residence with FHA financing, you’ll only need a 3.5% down payment. This makes buying a multi-unit property much more affordable than a 20% down conventional loan. Here’s what you need to know about purchasing a duplex with an FHA mortgage.
Overview of FHA Loans
FHA loans are government-backed mortgages insured by the Federal Housing Administration. Here are some key features:
- Requires only 3.5% down payment on a duplex purchase.
- Offers low mortgage insurance rates.
- Has flexible credit score requirements as low as 580.
- No income limits to qualify.
- Lower cash needed to close than conventional loans.
- Popular with first-time homebuyers.
These advantages make FHA financing a great option for purchasing a duplex, especially if you have limited funds for a down payment.
FHA Occupancy Requirements
To purchase a duplex with an FHA loan, you must plan to occupy one of the units as your primary residence Living in the property yourself makes it eligible for a primary mortgage versus an investment loan
FHA has occupancy rules for duplexes and multi-unit properties
- For a duplex, you must live in one of the two units.
- For a three-unit property, you must occupy one of the units.
- For a four-unit property, you must occupy one of the units.
You cannot purchase the duplex solely as a rental property with an FHA loan. The owner-occupancy requirement allows you to qualify for the low down payment.
Using Rental Income to Qualify
A major bonus of FHA loans for duplex purchases is being able to use projected rental income to qualify. Here are the guidelines:
- If the duplex unit is vacant, you can use 75% of fair market rent as income.
- If the unit is occupied, you can use 75% of the current rent as income.
Having this additional rental income factored in allows you to qualify for a larger loan amount. It increases your buying power compared to just your personal income and employment.
Your lender will need to verify the unit is rent-ready if vacant. If occupied, they’ll confirm the rent with the current tenant. The rental income is calculated and added to your total income when running debt-to-income ratios.
FHA Loan Limits
The FHA has loan limits that cap the maximum loan amount based on the number of units:
- 1-unit duplex – Up to $970,800 depending on location
- 2-unit duplex – Up to $1,243,050 depending on location
- 3-units – Up to $1,472,550
- 4-units – Up to $1,842,950
FHA mortgage limits vary by state and county. Your lender will confirm the specific loan limits in your area. The duplex sales price and loan amount cannot exceed these caps.
Down Payment Sources
You’ll need to have the 3.5% minimum down payment plus closing costs for an FHA duplex purchase. Here are some options for down payment sources:
- Personal savings
- Checking/savings accounts
- Stocks/bonds/investments
- Retirement accounts (with qualifying exceptions)
- Gift funds from family members
- Down payment assistance grants or loans
All sources must be documented and verified by the lender. You cannot use a seller contribution toward the down payment with FHA financing.
Application Process
When getting pre-approved and applying for an FHA loan on a duplex, you’ll need to provide these items:
- Loan application with household and income info
- Credit report and scores from all three bureaus
- Employment verification and paystubs
- Tax returns and W-2s (past 2 years)
- Bank/asset statements to document funds
- Purchase contract for duplex property
- Listing of current residences (past 3 years)
Provide any additional documentation the lender requests to underwrite your loan. Be sure to disclose you plan to occupy one unit on the application.
Tips for Approval
Follow these tips when applying for an FHA mortgage on a duplex:
- Shop with several lenders to compare rates/fees.
- Review credit reports and resolve any errors.
- Pay down existing debts to lower debt-to-income ratio.
- Talk to lenders about down payment assistance programs.
- Research FHA requirements and documentation needed.
- Document all sources of income on your application.
- Get pre-approved so you know your price range.
- Ask the seller to pay for closing costs when negotiating.
- Hire a knowledgeable real estate agent experienced with FHA.
Taking these steps will help ensure a smooth loan process when purchasing your duplex.
Pros and Cons of FHA Loans on Duplexes
FHA financing for duplexes has advantages but also some potential drawbacks to consider:
Pros
- Low 3.5% down payment requirement
- Use projected rents to qualify for more
- Lower credit scores accepted
- Lower mortgage insurance than conventional
- No maximum income limits
- Lower out-of-pocket costs needed
Cons
- Must live in one unit as owner-occupant
- Monthly mortgage insurance payment
- Limit on seller contributions toward closing costs
- More documentation and oversight than conventional
Even with the extra steps and requirements, the benefits of the low down payment often make FHA the best financing option for first-time duplex buyers.
Alternatives to FHA Loans
Beyond FHA, here are some other financing options for duplex purchases:
- Conventional 97 Loan – 3% down conventional loan traded for higher mortgage insurance.
- Conventional Loan – Typically requires 20% down payment if not owner-occupied.
- VA Loan – No down payment for qualifying veterans. Must live in one unit.
- USDA Loan – 100% financing available in designated rural areas.
- Renovation Loan – FHA 203k or conventional options to finance repairs.
Shop multiple loan types to find the best mortgage solution for your financial situation. Connect with a loan officer knowledgeable about multi-unit properties to learn more about your options.
Expenses Beyond the Mortgage
When budgeting for a duplex, be sure to factor in expenses beyond just the monthly mortgage payment:
- Property taxes
- Homeowners insurance
- Mortgage insurance
- HOA fees if applicable
- Repair and maintenance costs
- Capital expenditures
- Management fees if not self-managed
- Vacancy costs and turnover expenses
Running cost analysis and budgeting for these expenses will give you a full picture of carrying costs. The rental income will help offset many of these.
Getting Started with an FHA Duplex Loan
Purchasing a duplex with an FHA loan can be an affordable method for first-time investors to enter the real estate market. Follow these steps to get started:
- Talk to a HUD approved lender about qualifying and required documents.
- Get pre-approved for an FHA loan to know your budget.
- Check duplex listings and focus your home search.
- Make an offer on a duplex that meets FHA requirements.
- Complete the loan application and underwriting process.
- Ensure the appraisal comes in at value and makes FHA approval.
- Finalize purchase and move into your new duplex!
With proper planning and preparation, an FHA loan can make buying a duplex achievable. Partner with a lender and real estate agent experienced in FHA financing to guide you through the process. Soon you can be collecting rental income to help achieve your real estate investment goals.
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.