FHA loans are pretty known for buying single-family homes. But, they are also useful for financing multifamily homes that can provide additional income to your family. The best thing about it? FHA’s ultra-low down payment of 3.5%.
Two, Three and Four
The Federal Housing Administration offers Section 203(b) mortgage loans for multi-unit homes:
- Duplex: a housing with two separate units or apartments.
- Triplex: a housing with three separate units.
- Fourplex: a housing with four separate units.
Each apartment or unit is self-contained having its own kitchen, bathroom, and bedroom(s).
Owner Occupancy
First and foremost, you must occupy one of the units as a principal residence. The FHA requires that the property must be owner-occupied; otherwise, the property will not be eligible for an FHA financing.
Loan Amounts
Multifamily homes have higher loan amounts compared to single-family homes. While the loan limit varies where the property is located (county), the baseline loan limits for most counties in the U.S. are:
- Duplex: $347,000
- Triplex: $419,425
- Fourplex: $521,250
Down Payment
You can put a down payment of as low as 3.5% on multifamily homes. Gifts from relatives, friends and/or down payment assistance programs are acceptable to fund down payments if they are properly documented.
Qualifying Income
You will be required to present your income and supporting documentation for underwriting. You may include rental income from the property for qualifying purposes, provided:
- There are renters as evidenced by existing lease agreements.
- If there are no renters, it’s possible to calculate projected rental income. But it can only be considered as gross income after vacancy and maintenance factor is considered.
Cash Reserves
For three- to four-unit dwellings, you are required to set aside a mortgage reserve worth three months of mortgage payments (principal, interest, taxes and insurance) at closing. They can’t be sourced from gifts.
Credit
You are required to meet FHA’s standard credit requirements. A credit score of at least 580 can qualify for the low down payment.
Five and Up
For multifamily housing with at least five residential units, FHA’s Section 223(f)/207 loans can be used. But, the project must meet these conditions to be eligible for the said financing:
- The property must be completed with kitchens and bathrooms, or
- The property must be substantially rehabilitated three years before any application for mortgage insurance is made.
While Sec. 207 loans allow for the construction and/or rehabilitation of rental properties, it is now mainly used for refinancing Sec. 223(f) loans. Multifamily projects that require substantial rehabilitation are referred to the Section 221(d)(4) loan program.
Effective April 1, 2016, the FHA will impose lower mortgage insurance rates on multifamily properties, as defined in its press release:
- For ‘Broadly affordable’ housing, the annual rates are lowered to 25 basis points.
- For ‘Affordable’ mixed-income properties, the annual rates are lowered to 35 basis points.
- For ‘Energy efficient’ properties, the annual rates are lowered to 35 basis points.
Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.
