When buying a house for the first time, you’d want to have it financed in the most affordable way possible. If you are willing to take on the role of being a landlord, purchasing a multifamily home can be a cost-effective way to enter pricey housing markets.
A loan taken out to buy a multifamily home allows for a portion of the anticipated income to be added onto the borrower’s income upon application. In this article, we’ll take a further look at the merits of buying a multifamily home, examine homeowner behavior and imposed lender restrictions.
Conventional Fannie Mae loans can be used to finance the purchase of a multifamily home. The same could be said for loans backed by Federal Housing Administration (FHA).
John Walsh, president of Total Mortgage Services in Milford, Connecticut, explained the down payment rates for conventional home loans. He shares that 15 percent down payment is needed for two-unit properties. For three or four units, it’s 25 percent.
Meanwhile, FHA loans need to be ‘self-sufficient’. This means that the adjusted rent total should be sufficient enough to cover the monthly mortgage. This would include the principal amount as well as interest. It should also cover costs incurred for insurance and taxes.
Available multifamily homes
Multifamily homes are available for owner-occupied properties with two, three, or four units. Properties larger than that generally require an applicant to file for a commercial loan.
Interest rates and reserve requirements
Reserve requirements are typically higher on multifamily loans. In New York, Michael McHugh of N.Y. Lenders says that some lenders require the borrower to have as much as six months’ worth of mortgage payments in the bank. This would depend on the amount of money a buyer is putting down and other loan risk factors.
As far as interest rates go, they are fairly consistent with those of single-family loans. Today’s low rates make for an added incentive to opt for a multifamily home loan.
Buyer profile and behavior
Buyers who apply for a multifamily home loan are usually buying a homelike this for the first time. They are mid-level earners, holding down jobs in law enforcement or the academe. Borrowers tend to live in the unit for a while. When the property value goes up, they sell or rent out their unit and buy something else.
The usual practice is that 75 percent of the estimated market rent that a property will generate can be added to the borrower’s income. This increases his chances of getting a loan to fund the purchase of his multifamily house of choice.
However, there are some lenders that place additional restrictions, otherwise known as overlays. Some don’t outright allow adding rental income onto the borrower’s qualifying income if he has no landlord experience.
Mr Walsh suggests that buyers who have been turned down should try a lender that specializes in these types of loans.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.