How To Get An Owner Occupied Multifamily Loan

Have you ever asked yourself, “what is owner occupied multi family real estate?” It doesn’t matter if you’re new to investing or a seasoned pro; this investment strategy can be more difficult to comprehend. Lucky for you, we’ve got a list of the pros and cons to help you better understand whether this investing style is for you. If you want lower mortgage payments, better financing options, and property management easy, multi family real estate would be an excellent addition to your portfolio. If, on the other hand, you don’t want to have to deal with finding and evicting tenants, tenant complaints, and potential conflicts of interest, you may be better off steering clear of this strategy.

Many new to real estate investing – as well as first-time homebuyers – choose duplexes, triplexes, and even “four-plexes” as their initial buy, and doing so is associated with both pros and cons.

An owner occupied multifamily loan allows you to purchase a property with multiple units while living in one of the units yourself. This type of loan provides an excellent opportunity to get into real estate investing while also enjoying the benefits of homeownership. In this comprehensive guide we’ll explain everything you need to know about getting an owner occupied multifamily loan.

What is an Owner Occupied Multifamily Loan?

An owner occupied multifamily loan, also sometimes called an owner occupant loan, refers to a mortgage loan for a property that has 2-4 units where the borrower will live in one of the units as their primary residence

The other unit(s) can be rented out to generate rental income. The rent from the other units can help qualify borrowers for the loan and offset the mortgage payment.

Owner occupied multifamily properties are considered single family homes, not multifamily properties Multifamily properties refer to 5+ units according to most lenders.

Benefits of an Owner Occupied Multifamily Loan

There are many benefits to getting an owner occupied multifamily loan rather than a single family home loan. Here are some of the top benefits:

Lower down payment requirements – Owner occupied multifamily loans often have lower down payment requirements than loans for single family homes or loans for investors purchasing multifamily properties. Down payments can be as low as 3.5%.
Rental income – The rental income from the other units can help offset your mortgage payment, making the property more affordable. Rental income is factored into the debt-to-income calculations when qualifying for the loan.
Appreciation – Owner occupied multifamily homes may appreciate faster than single family homes due to the rental income potential. This can help you build equity faster.
Tax benefits – Expenses associated with the rental units may be tax deductible, providing tax savings for owner occupants.
Economies of scale – Certain costs get reduced when spread across multiple units, such as land costs, which can make multifamily properties more profitable.
Use equity for other goals – You can tap into your equity later via a cash-out refinance or home equity loan/line for other financial goals.

Loan Options for Owner Occupied Multifamily Properties

When it comes to getting a mortgage for an owner occupied multifamily property, you have several loan options to consider:

FHA Loans

FHA loans are very popular for owner occupied multifamily homes. Highlights of FHA loans include:

Down payments as low as 3.5%
Lenient credit score requirements – usually 580 minimum
Low mortgage insurance premiums
Manual underwriting available for those who don’t fit strict requirements

Keep in mind at least one borrower must occupy the property as their primary residence for FHA loans.

Conventional Loans

Conventional loans are also an option for owner occupied multifamily homes. Down payments are usually higher, in the 15-25% range. However, you may be able to get lower mortgage interest rates than FHA, making them an attractive option for some borrowers. Credit score requirements are also higher, usually 620 minimum.

Portfolio Loans

Local banks or credit unions may offer portfolio loans for owner occupied multifamily properties. These loans are held in the bank’s own portfolio instead of being sold to investors on the secondary market. This provides more flexibility, but loan terms depend on each individual bank’s criteria.

USDA Loans

In eligible rural areas, USDA loans can be used to purchase owner occupied multifamily homes with no down payment required. Credit scores and debt-to-income ratios must meet program guidelines. USDA loans can be a great option for purchasing multifamily homes in rural locations.

VA Loans

If you’re a veteran, VA loans are possible for owner occupied multifamily homes up to 4 units. No down payment is required and underwriting is flexible. However, a VA funding fee applies unless you receive VA disability compensation. VA loans offer very competitive interest rates.

Qualifying for an Owner Occupied Multifamily Loan

When applying for an owner occupied multifamily loan, there are several key factors lenders will evaluate to determine if you qualify:

Credit Score – Most lenders require a minimum credit score in the 580-620 range. The higher your score, the better mortgage rates you can qualify for.

Debt-to-Income Ratio – Your total monthly debt payments (including the mortgage payment) divided by your gross monthly income must fall under a certain threshold, often 45-50%. Rental income is included when calculating this ratio.

Rental Income – Lenders use the appraised market rents for the units, minus a vacancy factor around 25%, when calculating how much rental income to credit you with for qualifying purposes. You need enough rental income to cover most of the mortgage payment.

Down Payment – Lower down payments between 3.5% to 25% are common, depending on the loan program. Conventional loans typically require 20-25%.

Reserves – Expect to have 2-6 months of mortgage payments in reserve post-closing. Reserves should be cash or cash equivalents.

Meeting these requirements takes some preparation. Work on boosting your credit score, reducing other debts, saving up reserves, and finding a property with strong rental demand in advance.

Finding the Right Owner Occupied Multifamily Property

Not just any multifamily property is right for an owner occupied loan. Here are tips for finding a suitable property:

Location – Find a property in a desirable rental location near employment centers, transportation, schools, and amenities. This attracts top tenants.
Property Condition – Make sure the property is in good condition with no major repairs needed that might not qualify for financing. If repairs are needed, factor this into your offer price.
Separate metering – The utilities for each unit should be separately metered to easily split costs when renting. If not, have the seller install separate meters.
Layout – The property should be designed for multifamily use with separate entrances, no internal connections between units, and laundry hookups in each unit.
Cash flow – Make sure projected rents provide enough cash flow to cover the mortgage, maintenance, insurance, taxes, and other expenses.
Condo/HOA rules – If part of a condo or HOA, make sure the bylaws allow for rentals without unreasonable restrictions.

Finding the ideal owner occupied multifamily property takes research and an experienced real estate agent.

Getting Pre-Approved

Prior to making offers, it’s essential to get pre-approved for an owner occupied multifamily loan. Pre-approval involves completing a full loan application and underwriting process upfront. You’ll receive a pre-approval letter stating the maximum loan amount, rate, and terms you qualify for.

Getting pre-approved makes your offer stronger versus just being pre-qualified. Sellers will know you are a serious buyer who has been thoroughly vetted by a lender.

Be sure to get pre-approved from several lenders and compare terms. Apply with both banks and mortgage brokers to find the best fit for your situation.

Making an Offer

Once pre-approved, you are ready to make offers on owner occupied multifamily properties. Here are some tips for making a compelling offer:

List price – Research comps to determine fair market value and make an offer at or slightly below this price. Price too low and risk offending the seller.
Earnest money – Put down a sizable earnest money deposit, like 2-5% of the purchase price, to demonstrate you are serious.
Quick close – Offer to close in 30 days or less. State you have completed due diligence and are ready to close quickly.
Limited contingencies – Keep contingencies like for inspections and appraisal limited to 7-10 days. Avoid financing contingencies since you are pre-approved.
Personal letter – Write a letter to the seller introducing yourself, your plans to occupy one unit, and why you’d be an excellent steward of the property.
Backup offer – If needed, offer to provide backup offer terms in case their first offer falls through.

Make your offer competitive to beat out investors making cash offers or other buyers.

Closing on an Owner Occupied Multifamily Loan

If your offer is accepted, you move forward with final underwriting and towards the closing table. Be responsive to your lender’s requests for paperwork.

Just before closing, you will receive a Closing Disclosure outlining the final loan details, fees, taxes, title charges, and escrow amounts. The lender will also order an appraisal and sign off on the final loan approval shortly before closing.

At the closing appointment, you’ll sign all your closing documents to finalize the transaction. Bring a cashier’s check for the closing costs and down payment. Afterwards, you’ll receive the keys and officially become the owner!

Tips for Managing an Owner Occupied Multifamily Property

Once you purchase an owner occupied multifamily home, you become both a homeowner and a landlord for the other units. Here are some tips for managing the property:

Owner Occupied Multi Family Financing

One- to four-unit owner occupied properties can be much easier and more attractive to finance than even single-family homes, which are purely to be used as investment properties. It can mean a smaller down payment (or even 100 percent financing), better interest rates, and easier qualification requirements.

You’ll never be stuck guessing about what is going on with your real estate investment holdings. You’ll be right next door, conveniently positioned to collect rent and make sure your property is being taken care of.

Investing in passive income can be a great way to secure future financial freedom, but keeping track of your property from afar can increase issues. When you live right next door, you’ll never have to wonder whether or not your property is maintaining good shape. When tenants know their landlord is living next door, they will be more likely to treat the property as if it was their own.

Owner Occupied Multi Family Real Estate Drawbacks

Tenants could be difficult to work with
It can be hard to find prospective renters
Conflicts of interest may occur.

While owner occupied investing can be a great way to get your real estate career started, it doesn’t come without challenges. These obstacles will either send you running for the hills or the finish line. Read on to discover whether or not you’re ready to take it to the next level.

Simultaneously, being so close to your tenants makes it far easier for them to complain at any time of the day or night, which can actually increase your repair and maintenance costs, not to mention being a huge pain.

One way to avoid this issue is by giving your tenants strict rules regarding when and how they can submit maintenance requests. Enforce traditional business hours (and perhaps even a mailbox system) to ensure tenants treat your time with respect.

Many potential renters aren’t going to want to live somewhere where the landlord lives onsite. They want the freedom to make noise or throw parties or pay rent late (receiving a late fee, of course). To impress prospective tenants, advertise a list of amenities your home offers. What makes your property better than your neighbors? Is your rent price competitive? Will you offer to pay for utilities? Require a strict screening process and be transparent with those who apply. Consider how they must be feeling and reassure them that you are not there to act as a micro-manager. So long as your property has plenty to offer, potential tenants will flock.

Even if you find great tenants, problems can still arise. Building close personal relationships with your renters can make it difficult to be objective about your real estate investing and make purely business-based decisions.

The last thing any homeowner/landlord wants is to get taken advantage of by their tenants and/or lose a friend. Escape this problem by either setting boundaries between you and your tenants or choosing a tenant you truly trust (think, a close friend or family member.) Whomever you select as your next tenant needs to understand your role in the transaction. As long as you are upfront from the start, conflicts of interest should not occur.

WATCH THIS Before Buying Your First Multifamily Rental Property with an FHA Loan!

FAQ

Can I buy a 4 plex with an FHA loan?

Under the traditional FHA mortgage program, clients can purchase a home with up to 4 units. The advantage of this is that borrowers can get favorable terms such as a low down payment and they may receive lower interest rates than they would with the typical multifamily loan.

What is an owner-occupied loan?

Owner-occupants are residents who own the property where they live. Some loans are only available to owner-occupants and not absentee owners or investors. To be considered owner-occupied, residents usually must move into the home within 60 days of closing and live there for at least a year.

Does FHA check owner occupancy?

FHA Occupancy Requirement Under FHA rules and guidelines, the property being financed must be occupied by the owner. This means that rental and seasonal properties do not apply. The FHA uses this rule to prevent investors from benefiting from the program.

What is the 5% rule for Fannie Mae?

If the credit report does not show a required minimum payment amount and there is no supplemental documentation to support a payment of less than 5%, the lender must use 5% of the outstanding balance as the borrower’s recurring monthly debt obligation.

What types of loans are available for owner occupied multi family homes?

Here are the most common loans for financing owner occupied multi family homes: FHA Loan: the Federal Housing Administration offers FHA loans to first-time homebuyers who are planning to live in one of their multi family property’s units. They are designed to help low-to-moderate income borrowers buy a home they may not have otherwise been able to.

Do you qualify for a multifamily owner occupied loan?

To qualify for a multifamily owner-occupied loan, the property must have five or more units. Multifamily loans can be further broken down depending on whether you choose to live on the property (owner-occupied) or not. Properties with five or more units may qualify for commercial loans designed for owner-occupied purposes.

What is an owner occupied FHA multifamily loan?

One unique feature of owner-occupied FHA multifamily loans is the FHA 203 (k) loan option. This loan program allows owner-occupiers to finance both the purchase and renovation of a multifamily property. This can be particularly beneficial for individuals who are looking to invest in a property that requires some repairs or upgrades.

What is owner occupied multifamily investing?

In short, owner-occupied multifamily investing is when you purchase and live in a multifamily (2-4 unit) home and rent out remaining units. This strategy opens a massive loophole for those who want to start investing but lack the typical 25% down required for an investment property.