FHA Multifamily Loan Guidelines: Everything You Need To Know

The Federal Housing Administration (FHA) offers multifamily loans to help investors, developers, and owner-occupants finance apartment buildings and other residential properties with 5 or more units. These government-insured loans have more flexible eligibility requirements than conventional mortgages, making them an attractive option for many borrowers. However, FHA multifamily loans do come with specific guidelines that dictate who can qualify and how the funds can be used.

In this comprehensive guide, we’ll explain FHA multifamily loan programs, eligibility requirements, application process, and more. Whether you’re looking to purchase, refinance, or renovate a multifamily property, read on to learn if an FHA loan is right for you

Overview of FHA Multifamily Loan Programs

The FHA multifamily mortgage insurance programs are administered by the Office of Multifamily Housing Programs under the umbrella of the Department of Housing and Urban Development (HUD). There are several loan programs available based on the purpose and property type

Section 221(d)(4) – For new construction or substantial rehabilitation of multifamily rental properties with 5 or more units Both for-profit and nonprofit sponsors can use this program
Section 207/223(f) – For purchasing or refinancing existing multifamily rental housing with at least 5 units. The property must be at least 3 years old.
Section 202 – Direct loans to private nonprofit organizations to construct affordable rental housing for the elderly.
Section 811 – Direct loans to nonprofit organizations to build affordable rental housing with supportive services for people with disabilities.

In addition to these main programs, the FHA also offers specialized loans like the Green Refinance Plus program, loans for manufactured housing, and more.

Benefits of FHA Multifamily Loans

FHA multifamily loans offer several advantages compared to conventional mortgages:

Lower down payments – FHA programs allow down payments as low as 10% for market-rate properties.
More flexible underwriting – FHA uses manual underwriting to evaluate each loan application individually, so borrowers who might not meet conventional criteria could still qualify.
Lower interest rates – Interest rates on FHA loans are generally lower than conventional loans thanks to the government mortgage insurance.
Longer repayment terms – FHA multifamily loans can have terms up to 40 years for new construction or 35 years for refinancing.
Assumable financing – Subsequent buyers can assume the remainder of the FHA mortgage, subject to HUD approval.

FHA Multifamily Loan Eligibility Requirements

To qualify for an FHA insured multifamily loan, borrowers and properties must meet certain criteria:

Borrower Requirements

Sufficient financial capacity to support the mortgage payment and operating expenses
Commercial real estate experience and satisfactory performance on prior government-insured loans
Good reputation and character
U.S. citizenship or permanent residency

Property Requirements

Residential rental property with 5+ units
Min 90% occupancy for refinancing
Located in an eligible area per FHA requirements
Meet FHA minimum property standards and habitability criteria

Loan-To-Value Limits

Up to 83.3% for market-rate properties
Up to 87% for affordable housing

Debt Service Coverage Ratio

Min 1.11 for market-rate properties
Min 1.15 for affordable properties

Interest Rates

Determined by market rates and set by lenders

In addition, all FHA multifamily loans require the borrower to personally guarantee repayment of the mortgage.

The FHA Multifamily Loan Process

Getting an FHA multifamily loan involves several key steps:

1. Initial Eligibility Review

The lender will assess the borrower’s financial capacity, experience, credit, and other eligibility factors. Subject to the lender’s approval, they’ll issue a preliminary commitment letter.

2. Underwriting & HUD Firm Commitment

The lender will fully underwrite the loan and submit it to HUD for final approval and issuance of a firm commitment. HUD will analyze the borrower’s creditworthiness and the market feasibility of the project.

3. Closing & Endorsement

Once all conditions specified in the firm commitment are met, the lender can close the loan. After closing, HUD will endorse the mortgage note and begin insuring the loan.

4. Construction Period

For new construction/renovation loans, HUD will monitor progress throughout the construction phase. The loan converts to permanent financing after all work is completed per the plans and specs.

5. Loan Servicing

The lender services the permanent mortgage and submits financial statements to HUD annually to demonstrate the property’s financial health.

The entire process usually takes 6-12 months from pre-application to closing for market-rate loans. Affordable housing loans may take longer due to the additional layers of financing.

Tips for Securing FHA Multifamily Financing

If you’re considering applying for an FHA multifamily loan, keep these tips in mind:

Seek out an approved FHA lender with multifamily lending experience early in the process. Not all lenders offer FHA multifamily mortgages.
Be ready to personally guarantee the loan. This is required for all principals with 25% or more ownership stake.
Make sure the property meets FHA physical requirements or budget appropriately for rehab costs.
Have your ducks in a row with organizational documents, financials, appraisal, and all required paperwork.
Get help navigating the process. FHA multifamily loans are complex, so consider hiring a consultant or attorney.
Be patient and persistent. The back-and-forth with lenders and HUD can be frustrating but hang in there.

Alternatives to FHA Multifamily Loans

FHA isn’t the only financing option for apartment buildings and other multifamily properties. Some alternatives to consider include:

Fannie Mae and Freddie Mac – The GSEs also offer multifamily mortgages for 5+ unit buildings. Requirements are stricter than FHA but may offer lower rates.
Bank/Life Company Loans – Many banks and institutional lenders provide multifamily and commercial real estate loans. Rates vary.
State/Local Housing Agency Loans – State and city housing finance agencies offer multifamily development financing, often with below-market rates for affordable housing.
Private/Hard Money Loans – An option for borrowers who need flexible underwriting, but higher costs and short terms.
Crowdfunding – Developers can raise funds for multifamily projects through real estate crowdfunding platforms.

The Bottom Line

FHA multifamily mortgage insurance programs provide an affordable financing source for developers, investors, and owner-occupants seeking to buy, build, or refinance apartment buildings or other residential income properties. Although the programs come with extensive requirements, the benefits like low down payments and below-market interest rates make FHA loans worthwhile for many borrowers.

If you’re considering an FHA multifamily loan, be sure to connect with an approved lender early on to allow ample time for the lengthy underwriting and approval process. With proper planning and persistence, an FHA-insured mortgage can help you successfully finance your next multifamily project.

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.

FHA Multifamily Loan Guide: Everything You Need To Know

FAQ

Can you use an FHA on a multifamily property?

You can purchase a larger property with five or more units using FHA multifamily financing as long as the purchase qualifies under the FHA’s exceptions to the owner-occupied rule. If the property you’re interested in meets FHA multifamily requirements, you may qualify for financing.

What is the debt to income ratio for a FHA multifamily loan?

In order to qualify with a median FICO^® Score of between 580 and 620, you need a housing expense ratio no higher than 38% and an overall DTI of 45% or lower. If your score is 620 or better, FHA systems will approve you with a back-end DTI as high as 67%, although this varies based on other qualifying factors.

What is the DTI limit for FHA in 2024?

The FHA-recommended limit is a DTI ratio of 43%. However, even if you have a higher DTI ratio, lenders can still consider you if you have considerable cash reserves and a high income.

What is the 2 FHA loan rule?

A second FHA loan may be allowable for homebuyers who meet these qualifying criteria: You’re relocating for a new job and need a new primary residence. The new home is more than 100 miles away from your current FHA-financed home. You’re getting a divorce and you intend to purchase a new home in your name only.

What are the FHA requirements for a multifamily loan?

The FHA has various requirements to obtain a multifamily loan, including a rigorous appraisal process, using an appraiser approved by the FHA. Certain conditions will need to be met, such as: FHA multifamily loans also apply to certain healthcare facilities, disability housing, and senior housing.

What are FHA multifamily loans?

FHA multifamily loans are different from standard FHA mortgage loans, with varying qualifications and loan limits. If you are thinking of using FHA financing to buy a multi-unit property, here’s what you need to know.

Do FHA multifamily loans have an upper borrowing limit?

Start here In contrast to single-family home loans, which have borrowing limits determined by the number of units and occupancy plans, FHA multifamily loans do not have an upper borrowing limit. To qualify for FHA multifamily loans, you must have a loan-to-value (LTV) ratio of at least 87% to 90%.

What are the eligibility requirements for FHA multifamily loans for commercial investors?

It is worth noting that FHA multifamily loans for commercial investors also have certain eligibility requirements. These requirements include a minimum credit score, a demonstrated ability to manage rental properties, and a solid financial history.

What credit score do you need for a multifamily loan?

The Federal Housing Administration (FHA) provides these loans, which offer attractive terms and low down payment options. One of the key requirements for an FHA multifamily loan is a minimum credit score of 580.

Where can I get an FHA multifamily loan?

There are eligible lenders nationwide that offer various types of FHA multifamily loans. A good resource to begin your search and find a lender is via the FHA-approved lender online directory provided by the HUD.