Everything You Need To Know About Getting Loans For Multi Family Homes

Buying a multi family home can be an excellent investment opportunity. With several units that can be rented out, you can generate rental income to help cover your mortgage payment. However, financing a multi family property requires more consideration than a single family home. In this comprehensive guide, we’ll cover everything you need to know about getting loans for multi family homes.

Overview of Multi Family Home Loans

Multi family properties are defined as having two to four units. This differs from single family homes with just one unit and larger apartment buildings classified as commercial real estate with five or more units.

When applying for a mortgage on a multi family home lenders will consider the following

• Your income, assets, credit score and debts like any mortgage
• Appraisal of the home’s value
• Rental income from units to help qualify for the loan

There are several loan options to finance multi family homes

• FHA loans – Allow a low 3.5% down payment and have flexible qualifying guidelines. At least one unit must be owner-occupied.

• Conventional loans – Typically require 10-25% down and have stricter requirements than FHA loans. Can be used for owner-occupied or investment properties.

• Portfolio loans – Offered by community banks and credit unions. May offer more flexible requirements than conventional loans when financing 2-4 unit buildings.

• Commercial loans – For larger apartment buildings with 5+ units. Higher down payments around 25% and stricter qualification terms.

FHA Multi Family Loan Requirements

FHA loans insured by the Federal Housing Administration are a popular option for owner-occupied multi family homes. Here are the main requirements:

• Down payment – Only 3.5% is required. Can be gifted.

• Credit score – At least 580 FICO for approval. Higher scores get better rates.

• Debt-to-income ratio – DTI up to 45% with credit score above 580. DTI up to 55% may be allowed with compensating factors.

• Occupancy – You must live in one of the units as your primary residence for at least one year.

• Rental income – 75% of fair market rent counted towards qualifying income.

• Mortgage insurance – Upfront and annual MIP premiums required.

FHA also offers 203(k) rehab loans to finance purchase and renovations together.

Conventional Multi Family Loan Requirements

Conventional loans conforming to Fannie Mae and Freddie Mac guidelines are more commonly used for 2-4 unit non-owner occupied investment properties. However, they can also be used for owner-occupied multi family homes. Here are some key facts on conventional multi family loans:

• Down payment – Typically 10-25% required depending on your credit, income, and number of units.

• Credit score – Minimum 620 FICO for the best rates and terms.

• Debt-to-income ratio – Front-end DTI up to 45% and back-end DTI up to 50% in most cases.

• Occupancy – Can be used for primary residence or investment property.

• Rental income – 75-85% of expected rent may be used for qualifying income.

• Mortgage insurance – Usually required when down payment is less than 20%.

Portfolio Multi Family Loans from Local Lenders

Smaller community banks and credit unions commonly finance multi family homes through their own portfolio loan programs. These lenders keep the loans on their own books rather than selling to Fannie Mae or Freddie Mac.

Portfolio loans offer more flexibility on approving borrowers who may not meet conventional requirements. They also allow higher loan-to-value ratios and lower down payments in some cases.

The main catch is that interest rates may be higher with portfolio loans. Shop around with a few local lenders to see if they can beat your other options.

Commercial Multi Family Loans

Once you get into apartment buildings and complexes with five or more units, most lenders will only offer commercial mortgages rather than residential loans.

Here are some things to know about commercial real estate loans for larger multi family properties:

• Down payment – Expect at least 25% down, sometimes as high as 35%.

• Credit score – Minimum score around 700 but requirements vary by lender.

• Debt-to-income ratio – Not a major factor. More focus on property cash flow.

• Occupancy – Investment property only. Owner-occupancy not allowed.

• Rental income – Must demonstrate sufficient cash flow to cover mortgage payments.

While commercial mortgages come with stricter borrowing terms, they also offer benefits like non-recourse loans and potential for higher leverage on cash-flowing properties.

How Much Rental Income Do Lenders Count?

A key factor that comes into play when financing any type of multi family property is the rental income generated by units you don’t occupy. Lenders apply different limits on how much of this potential rent they will consider towards your qualifying income.

FHA loans – 75% of fair market rent can be added to your income. If financing a 4-unit property, the rental income must cover PITI each month after a 25% vacancy reduction.

Conventional loans – 75-85% of expected rent may be counted. Must document with lease agreements or provide a professional appraisal.

Portfolio loans – May be more flexible on rental income used for qualifying.

Commercial loans – Primarily focus on property cash flow to debt service ratio. Rental income scrutinized closely.

Provide solid documentation to support your projected rental income figures when applying for a multi family mortgage.

How Much Is a Down Payment on a Multi Family Home?

Down payment requirements vary more substantially for multi family homes compared to single family properties. Here’s an overview of typical down payment needs:

• FHA loans – Just 3.5% down required regardless of number of units. Can be gifted.

• Conventional loans – 10% down for 2-units, 15% down for 3-units, and 25% down for 4-units.

• Portfolio loans – May offer 5-10% down programs for creditworthy buyers.

• Commercial loans – Often a minimum 25% down payment required.

For conventional loans, once your down payment reaches 20% the added cost of mortgage insurance can be avoided.

What Credit Score is Needed?

While it’s possible to get approved for an FHA loan with a 580 credit score, you’ll get much better rates with a score of at least 620 or higher. Here are general credit score guidelines:

• FHA loans – Minimum 580 FICO. But 620+ recommended for best pricing.

• Conventional loans – At least 620 FICO for standard financing terms. Many lenders prefer 640+ score.

• Portfolio loans – May approve with scores around 600. Will carry higher rates.

• Commercial loans – Typically require at least a 700 credit score.

The higher your credit score, the better mortgage interest rate you can qualify for and potentially lower required down payment. Having great credit saves you money.

Can I Use Loan Programs Like VA or USDA?

Certain government-backed mortgage programs like VA and USDA loans can also be used to purchase multi family homes, within specified parameters:

• VA loans – Allowed for 2-4 unit owner-occupied homes up to county limit. Requires full entitlement.

• USDA loans – Limited to 2-4 units in designated rural areas only. Not available in all locations.

• FHA, Conventional, Portfolio – More commonly used in most areas, especially for investment properties or higher home values.

VA and USDA loans offer great benefits for eligible borrowers like no down payment and very competitive rates. But program availability is limited.

Tips for Getting Approved for a Multi Family Mortgage

If you want the best shot at getting approved for a mortgage on a multi family property, keep these tips in mind:

• Have a down payment ready – At least 10% down or more is ideal to get the best financing terms.

• Improve your credit – Shoot for at least a 680 FICO score before applying by paying down debts.

• Lower your DTI – Lenders look closely at your existing monthly debt payments and obligations.

• Document rental income – Provide leases, comparable rents, or professional appraisal to support income.

• Limit investments – Large assets like stocks may make lenders think you don’t need as much financing.

• Pick the right property – Make sure the home appraises for enough to support the loan request.

Alternatives If You Can’t Get A Mortgage

Purchasing a multi family home with cash or other alternative financing options may make sense if you don’t qualify for a traditional mortgage right now. Some other possibilities include:

• Hard money loans – Asset