FHA Loan Requirements for Multifamily Homes: A Comprehensive Guide

The FHA offers attractive financing options for multifamily homes, allowing borrowers to purchase a property with multiple units while occupying one unit themselves. FHA loans have flexible guidelines and low down payments, making them popular for owner-occupants of small multifamily buildings. However, these loans come with specific requirements. This comprehensive guide will outline everything you need to know about FHA loan requirements for multifamily homes.

What is Considered a Multifamily Home?

The FHA defines a multifamily home as any property with 5 or more units Single-family homes with 2-4 units are still classified as single-family by the FHA, The requirements for FHA loans are different depending on whether you are financing a single-family multi-unit home or a true multifamily building,

For single-family multi-unit buildings (2-4 units), at least one unit must be owner-occupied as your primary residence and normal FHA guidelines for credit score, income, and debt ratios apply. For 5+ unit multifamily buildings, FHA rules for investment or commercial properties apply which have more stringent requirements.

Overview of FHA Loan Requirements for 2-4 Unit Owner-Occupied Homes

If you plan to live in one unit of a 2-4 unit single-family property and rent the other units here are the key FHA loan requirements to be aware of

• Minimum credit score: 580
• Downpayment: 3.5% of purchase price
• Debt-to-income ratio: Max 45% back-end ratio
• Owner-occupancy: You must live in one of the units
• Income calculation: Uses rental income from units plus your personal income
• Appraisal: Includes rental income valuation

As you can see, FHA requirements are relatively flexible for owner-occupants compared to conventional mortgages. Credit and income requirements are lower, allowing more buyers to qualify. The key benefit is the low 3.5% downpayment compared to the typical 15-20% for conventional loans.

Overview of FHA Loan Requirements for 5+ Unit Multifamily Homes

For true multifamily buildings with 5+ units, FHA loans are considered commercial rather than residential. Here are some key requirements to be aware of:

• Minimum credit score: 640
• Downpayment: 10-25%
• Debt Service Coverage Ratio: 1.11+
• Owner-occupancy: Not required
• Appraisal: Uses commercial valuation methods
• Experience: Must demonstrate experience managing multifamily properties

As you can see, the bar is higher in terms of credit, downpayment, and experience required. These loans are geared towards professional real estate investors rather than regular homebuyers. The appraisal will also follow commercial guidelines rather than typical residential methods.

Detailed FHA Loan Requirements for Multifamily Homes

Now that we’ve covered the key differences in requirements between 2-4 unit and 5+ unit multifamily FHA loans, let’s explore some of these requirements in more detail:

Owner-Occupancy

For 2-4 unit buildings, the FHA requires owner-occupancy in one of the units. You cannot use FHA financing to buy a 2-4 unit property strictly as an investment. This ensures FHA loans are used for primary residences rather than commercial purposes.

For 5+ unit buildings, owner-occupancy is not required. The entire building can be rented out to tenants. These loans are geared for professional real estate investors.

Downpayments

The minimum downpayment is just 3.5% of the purchase price for 2-4 unit owner-occupied homes. This makes FHA loans much more affordable than conventional loans which typically require 15-20% down.

For 5+ unit buildings, minimum downpayments range from 10-25% depending on the size and type of property. More units generally require a higher downpayment percentage.

Loan Amounts

The maximum FHA loan amount for single-family homes is based on county-level limits that are updated annually by the FHA. 2-4 unit buildings fall under these same loan limits. High-cost areas can qualify for up to $970,800 with a 3.5% downpayment.

For 5+ unit buildings, the maximum loan amount is based on project cost limits that factor in things like building costs per unit and commercial property values. There is more flexibility than single-family loan maximums.

Interest Rates

Interest rates on FHA loans are competitive, though not quite as low as top-tier conventional mortgages requiring excellent credit and higher downpayments. On a 30-year fixed rate FHA mortgage, interest rates currently range from about 5.5% to 6.5% depending on your specific credit profile.

Rates for 5+ unit buildings may be slightly higher due to the increased risk compared to owner-occupied homes. Expect rates around 0.5 – 1% higher for multifamily investment properties.

Mortgage Insurance

FHA loans require both upfront and annual mortgage insurance premiums. On a typical 30-year multifamily loan, you’ll pay 1.75% of the loan amount upfront plus 0.45 – 0.9% of the loan amount per year.

On the upside, once you reach 22% equity in the home the annual premiums can be canceled. Mortgage insurance lasts for the full 30 year term on conventional loans.

Credit Score Requirements

For owner-occupied 2-4 unit buildings, the minimum FHA credit score requirement is just 580. This makes it possible for buyers with less-than-perfect credit to still qualify.

On 5+ unit buildings, minimum credit scores start at 640 and may go up to 700+ depending on the lender. Standards are tighter for these commercial loans. Excellent credit is strongly preferred.

Debt-to-Income Ratios

For 2-4 unit owner-occupied homes, standard FHA back-end (total) debt ratio limits apply. This means your total monthly debt payments, including the new mortgage, cannot exceed 45% of your gross monthly income.

On 5+ unit buildings, a different metric called the debt-service coverage ratio applies instead. This calculates your property’s net operating income against its total debt obligations, and generally needs to be 1.11 or higher.

Rental Income Calculations

On 2-4 unit owner-occupied homes, FHA loans allow rental income to help you qualify. 75% of appraised fair market rent from units is included to calculate your total income.

For 5+ units, obtaining commercial appraisals and analyzing detailed income/expense statements from the property’s financials is used to determine loan eligibility instead.

As you can see, FHA multifamily loan requirements differ significantly depending on the type of property. Be sure to consult with a knowledgeable loan officer to learn which requirements apply for your specific situation. The FHA offers great financing options for both owner-occupants and investors, but guidelines vary.

Bottom Line: FHA Multifamily Loans Offer Flexible Financing Options

FHA multifamily loans provide an affordable financing alternative compared to conventional mortgages, which is why they are so popular. Just be sure you understand the specific requirements based on property type before applying. Connect with a lender to go over your property, finances, and goals in detail to see if an FHA loan is right for you.