If you’re looking to invest in real estate, buying a multifamily property can be a great way to generate rental income. And if you’re looking for favorable financing terms, FHA loans may be a good option In this comprehensive guide, we’ll walk through what you need to know about getting FHA loans for multifamily properties
What is Considered a Multifamily Property by the FHA?
The Federal Housing Administration (FHA) has specific definitions when it comes to multifamily properties According to FHA guidelines
- A single-family property can have 1-4 units
- A multifamily property has 5+ units
So if you’re looking to purchase a duplex, triplex, or fourplex where you’ll live in one unit and rent the others, you’d apply for a single-family FHA loan. But once you get to 5+ units, it’s considered a multifamily property and you’d need to look into FHA’s multifamily programs.
FHA Financing Options for Multifamily Properties
The FHA offers a few different loan programs that multifamily investors can utilize:
Section 221(d)(4)
This program helps finance new construction or substantial rehabilitation of multifamily rental properties. Both for-profit and nonprofit developers are eligible to apply. Properties can range from 5+ units with no maximum.
Section 223(f)
This FHA loan program can be used to finance or refinance existing multifamily rental housing. The property must be at least three years old and not require substantial rehab. Both for-profit and nonprofit borrowers may qualify.
Section 232
Healthcare facilities including hospitals, assisted living facilities, and nursing homes may be eligible for FHA 232 financing. These loans can be used for new construction or purchasing/refinancing existing properties. Only for-profit developers can obtain this type of loan.
Section 242
Similar to Section 232, this program provides mortgage insurance for hospitals and assisted living facilities. But Section 242 loans can only be used to refinance/purchase existing properties, not for new construction. As with 232, it’s limited to for-profit entities.
In most cases, FHA multifamily loans will require at least a 10% down payment. Minimum credit score and debt-to-income requirements also apply, but are less strict than conventional multifamily loans.
Owner-Occupied Duplex/Triplex/Fourplex Properties
As mentioned above, the FHA considers properties up to 4 units as single-family. This means that an owner-occupant can qualify for an FHA loan to purchase a duplex, triplex, or fourplex to live in one unit and rent the other(s).
However, there are some specific guidelines:
- You must occupy one of the units
- 75% of the rental income can be used to qualify if there’s a current lease
- Without a lease, just 75% of the appraiser’s estimated fair market rent can be used
- The rental income must cover the full PITI mortgage payment
These stipulations ensure that the rentals genuinely provide enough income to support the mortgage payment. FHA will also require a higher down payment if the projected rental income is too close to the PITI amount.
Pros and Cons of FHA Multifamily Loans
FHA multifamily loans offer some advantages, but also have drawbacks to consider:
Pros
- Lower down payment requirements
- More flexible qualifying guidelines
- Non-recourse financing available
Cons
- Required upfront and annual mortgage insurance premiums
- Lengthy application and approval process
- Lower per-unit loan limits
- Properties must meet FHA standards
The pros of easier qualifying and lower down payments can make FHA multifamily loans attractive. But the cons like mortgage insurance costs and stricter property requirements are tradeoffs to weigh.
Alternative Multifamily Financing Options
Beyond FHA loans, here are some other multifamily financing options:
Conventional Loans – Offered by private lenders like banks/credit unions. Require 20-30% down payment and good credit.
Bridge Loans – Short-term loans used for property renovations or between financing. Higher rates and fees.
Hard Money Loans – Asset-based loans from private investors. Easy to qualify, but very high rates.
Commercial Loans – Loans for larger apartment complexes, office buildings, etc. Strict eligibility and down payments.
Portfolio Loans – An array of loan programs from banks/lenders. More flexibility than standard mortgages.
Crowdfunded Loans – Pooled funds from individual investors. Higher rates, but easier to qualify.
As an investor, it’s wise to shop and compare rates/terms from multiple lender sources when financing a multifamily purchase. FHA provides one option, but may not always be the best fit depending on your financials and the property itself.
What are the Steps to Getting an FHA Multifamily Loan?
If you decide an FHA multifamily mortgage is right for you, below are the general steps of the process:
-
Find an eligible property – Make sure the building has 5+ units and meets FHA standards.
-
Get pre-approved – Confirm you meet FHA borrower requirements before making an offer.
-
Make an offer/enter contract – Your pre-approval letter will give you negotiating power.
-
Submit loan application – Work with lender to complete full application and documentation.
-
Get appraisal – FHA will review the appraisal to ensure property value.
-
Receive loan commitment – Final loan approval from underwriting.
-
Close on mortgage – Finalize paperwork, down payment, fees, etc.
-
Rehab property if needed – If renovations are planned, complete them now.
The entire process can take several months from start to closing. Experience with FHA guidelines and patience is key to successfully securing financing.
Common Questions About FHA Multifamily Loans
Here are answers to some frequently asked questions about FHA multifamily mortgages:
Can I use rental income to qualify for the mortgage payment?
Yes, FHA allows 75% of projected fair market rent from units to help qualify. This is a major perk compared to conventional loans.
What are the mortgage insurance premiums on FHA multifamily loans?
You’ll pay an upfront mortgage insurance premium of 0.5-1.0% of the loan amount at closing. There are also annual premiums of 0.45-0.7% of the loan balance.
What are the per-unit loan limits on FHA multifamily properties?
Currently FHA caps loans at about $80,000 per unit for market-rate units. So a 10-unit property would max out around $800,000. High-cost areas can qualify for limits 15% higher.
Can I use an FHA rehab loan to finance repairs?
Yes, Section 223(a)(7) loans allow you to finance purchase and rehab costs in one FHA-insured mortgage. Limits on total rehab costs apply.
What are the minimum credit score and down payment requirements?
In most cases, FHA requires a minimum credit score of 640 and down payment of 10%. Lower scores may be allowed with a larger down payment.
Bottom Line
FHA multifamily loans provide a viable financing option for real estate investors to purchase apartment buildings and other rental properties. If you’re interested in taking advantage of FHA programs for a multifamily purchase, connect with an approved lender to learn more about rates, terms, and start the application process. With proper planning and strategic use, FHA loans can help build your rental property portfolio.
FHA Insured Loan Programs
FHA insures multifamily loans originated by FHA approved lenders for the construction, substantial rehabilitation, and acquisition and refinancing of apartments and health care facilities.
All applications for new construction and applicable refinancing proposals must participate in a Concept Meeting.