Getting an FHA Loan on a Multifamily Property: A Complete Guide

If you’re looking to purchase a multifamily property as an investment, one option you may consider is getting an FHA loan. FHA loans are backed by the Federal Housing Administration and offer more flexible underwriting guidelines than conventional loans. This can make it easier to qualify, especially if you have limited funds for a down payment or less-than-perfect credit.

However, FHA loans come with some specific requirements when used to purchase multifamily properties. In this comprehensive guide we’ll explain everything you need to know about getting an FHA loan on a multifamily property including

• What is an FHA multifamily loan?
• FHA loan requirements for multifamily properties
• The pros and cons of FHA multifamily loans
• Alternatives to FHA multifamily loans
• Tips for applying and getting approved

Let’s dive in!

What is an FHA Multifamily Loan?

An FHA multifamily loan is a mortgage insured by the Federal Housing Administration that is used to purchase a property with 5 or more units. The FHA insures these loans, which are made by private lenders like banks and mortgage companies. This insurance protects the lender if the borrower defaults.

The FHA multifamily mortgage program aims to facilitate affordable rental housing. These loans make it easier for investors and developers to acquire and rehabilitate multifamily properties. They offer flexible underwriting, low down payments, and below-market interest rates.

However, FHA multifamily loans differ from regular FHA loans in a few key ways

• Minimum 5 units – Regular FHA loans can be used to purchase a 1-4 unit property. FHA multifamily loans are for 5+ units.
• Non-recourse – The loan is secured by the property only, not personal assets.
• No owner-occupancy required – You can use an FHA multifamily loan to purchase an investment property.

The FHA insures over 2 million multifamily units through various loan programs. These include market rate, affordable, assisted living, and healthcare multifamily housing.

FHA Loan Requirements for Multifamily Properties

While FHA multifamily loans offer more flexible qualifying guidelines, there are still specific requirements you’ll need to meet:

Borrower Requirements

• Business purpose – You must be purchasing as an investment to generate rental income.
• Experience – Most lenders require at least 2 years of multifamily ownership or management experience.
• Net worth – A minimum required net worth varies by lender but is usually 6-12 months of principal and interest payments.
• Credit score – Typically a minimum 620 FICO score is required.

Property Requirements

• Minimum 5 units – Duplexes or triplexes don’t qualify. All units must be residential rental apartments.
• Good condition – Properties must meet FHA minimum property standards and pass an appraisal.
• Cash flow – Projected net operating income must cover debt service by 115-120%.
• Occupancy – Minimum 90% physical occupancy for refinances, 85% for purchases.
• Management – An approved management plan is required.

Loan Terms

• Down payment – Typically 10-25%. Gifts and grants can also be used.
• Loan amount – Up to 83.3% of appraised value for market rate properties. Higher for affordable housing.
• Interest rate – Below conventional mortgage rates. Fixed for full term.
• Loan term – Up to 40 years for new construction, 35 years for refinance.
• Mortgage insurance – An upfront 1% mortgage insurance premium and 0.6% annual premium.

Application Requirements

To apply, you’ll need to submit:

• Rental schedule breakdown of all units
• Three years federal tax returns
• Personal financial statement
• Multifamily management experience resume
• Copies of leases
• Property inspection report
• Appraisal

Getting pre-approved early in the process can help give you an edge when making offers.

The Pros and Cons of FHA Multifamily Loans

Pros

• Low down payments, as little as 10%
• Below market interest rates
• Low mortgage insurance premiums
• Non-recourse – no personal liability
• Assumable financing can be transferred to new buyer
• Long loan terms up to 40 years

Cons

• Strict underwriting and approval process
• Requires extensive documentation
• Minimum 2 years experience required
• Property condition requirements
• High upfront costs – appraisal, fees, prepaids
• Prepayment penalties for early payoff

While FHA multifamily loans offer nice perks, the application and approval process is quite rigorous. Many small investors may find it too demanding and opt for other financing instead.

Alternatives to FHA Multifamily Loans

If you decide an FHA multifamily loan isn’t the right fit, here are a few other financing options to consider:

Conventional Multifamily Loans

These loans offered by private lenders provide more flexible terms overall but come with higher down payments around 25-30%. They have less application paperwork and quicker processing than government multifamily loans.

Bridge Loans

A short-term bridge loan can provide quick financing for multifamily purchases needing minor repairs prior to getting permanent financing. Bridge loans come with higher rates and fees but quicker approvals.

Commercial Loans

Loans from a commercial lender are recourse, require full personal guarantees, and have variable interest rates. But they offer faster approvals and lower down payments, such as 20%.

Crowdfunding

Newer platforms like ArborCrowd allow you to crowdfund a multifamily downpayment from pool of private investors. This expands your available capital sources.

Hard Money Loans

A short-term hard money loan from a private investor is an option if you need funds fast for a deal and have an immediate exit strategy. Rates are high but underwriting is simple.

Each financing option has tradeoffs to weigh based on your specific multifamily investment goals and financial situation.

Tips for Applying and Getting Approved

If you’ve determined an FHA multifamily loan is your best choice, here are some tips to help get approved:

• Check property eligibility – Make sure the property meets FHA location, construction, and occupancy standards before getting too far along.

• Get prequalified – Talk to a couple lenders to see what you may qualify for. This helps you make realistic offers when shopping.

• Review loan program options – FHA has various multifamily products like 221(d)(4), 223f, 221(a)(7), etc. Know which fits best.

• Claim all possible income – Be sure to document all rental and any other income sources to maximize debt ratios.

• Explain past credit issues – Have a strong letter clearly outlining any past struggles impacting your credit.

• Highlight experience – Clearly present your credentials managing or owning multifamily properties.

• Start gathering documents early – It can take weeks to collect all the required FHA application items.

• Hire a loan broker – An experienced FHA multifamily mortgage broker can help navigate the complex process.

With proper preparation and persistence, securing FHA multifamily financing is possible even for first-time investors. Following these application tips can help better your chances for approval.

Wrapping Up

FHA multifamily loans provide a viable financing option for investors, developers, and first-time buyers looking to get into larger scale rental properties. They offer more lenient qualifying guidelines than conventional mortgages.

However, the application and approval process for FHA multifamily loans is meticulous. If you don’t have the required experience or access to upfront costs, other alternatives like a conventional or bridge loan may be a better fit.

The key is researching all your choices to find the right loan program for your situation. Focus on lenders specializing in multifamily mortgages. And don’t get discouraged if your first loan application gets denied – be prepared to shop around and compare multiple options.