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How to Buy a Multifamily Property with FHA Financing
Learn how to buy a multifamily property with FHA and secure low down payments, competitive rates, and flexible credit requirements for your investment journey as a homeowner
Lisa, a young professional, was excited to talk about real estate with her advisor. They discussed FHA loans, which allow you to buy a property with up to four units. You can live in one unit and rent out the others. The advisor said the low down payment and good interest rates make it perfect for first-time investors.
Lisa was really interested in this idea. She wanted to invest in real estate and still have a home to live in. The FHA’s multifamily loan program seemed like the ideal choice for her.
Table of Contents
Key Takeaways
- FHA multifamily loans allow borrowers to purchase properties with up to four units, living in one unit while renting out others.
- These loans offer favorable terms, including low down payments (as low as 3.5%) and competitive interest rates.
- FHA loans are designed for owner-occupiers, not commercial investors, and can be used for properties with up to four units.
- The FHA joined HUD in 1965 to make housing more accessible to home buyers with lower incomes or past credit issues.
- FHA multifamily loans can be a great option for first-time real estate investors looking to get started in the market.
Understanding FHA Multifamily Loan Basics
The Federal Housing Administration (FHA) offers financing options for buying multifamily properties. This makes it easier for real estate investors to enter the market. Knowing the FHA’s loan requirements and benefits is key to success.
What Qualifies as a Multifamily Property?
The FHA calls properties with 5 or more units multifamily. Those with 4 units or less are single-family homes. It’s important to know this because the rules and financing options differ.
Eligible multifamily properties include high-rise buildings, condominiums, and mixed-use buildings. The building must have at least 51% residential space.
Types of FHA Multifamily Financing Options
- Acquisition loans: These loans help buy a multifamily property outright.
- Construction-rehab loans for co-ops: FHA financing is available for building or renovating cooperative apartment buildings.
- Construction-rehab loans for condos: FHA loans can also fund the construction or major renovation of condominium projects.
Benefits of FHA Multifamily Loans
FHA multifamily loans have many benefits for investors: Lower interest rates, easier underwriting, and the chance to wrap renovation costs into the mortgage. Also, the FHA requires only a 3.5% down payment for one to four-unit properties. This makes it easier for first-time and low-income buyers to own a home.
By understanding FHA multifamily loan requirements and benefits, investors can confidently explore the market. They can find new ways to grow their portfolios.
Key Requirements for FHA Multifamily Property Purchase
Buying a multifamily property with an FHA loan has certain rules. To qualify, borrowers must meet these criteria:
- FHA home loan rules allow buying properties with up to four living units.
- Borrowers must start using the home within 60 days after closing.
- They must live in the property as their main home for at least one year.
- Potential rental income can be included in the debt-to-income ratio on a case-by-case basis.
- Properties must meet FHA standards and pass an FHA appraisal.
- FHA down payment and credit score requirements are the same for single and multi-unit properties. However, lender standards may differ.
State laws and other rules can also affect FHA loans for multi-unit properties. This is especially true for those who want to become landlords after the loan is closed.
| FHA Multifamily Loan Limits for 2024 | Low-Cost Areas | High-Cost Areas |
|---|---|---|
| One-unit | $498,257 | $1,149,825 |
| Two-unit | $637,950 | $1,472,250 |
| Three-unit | $771,125 | $1,779,525 |
| Four-unit | $958,350 | $2,211,600 |
There are special areas in Alaska, Hawaii, Guam, and the U.S. Virgin Islands for FHA loans.
“FHA multifamily loans can be used for investment properties as long as they have no more than four rental units, and the buyer occupies one as their primary residence.”
How to Buy a Multifamily Property with FHA
Buying a multifamily property with an FHA loan is a smart move for real estate investors. FHA loans have lower down payment requirements and more flexible credit score guidelines than regular mortgages. But, there are certain rules and requirements to keep in mind when using FHA financing for a multifamily property.
Down Payment Requirements
FHA loans offer a low down payment option. For properties with up to four living units, you only need to pay 3.5% down if your credit score is 580 or higher. If your score is between 500 and 579, you’ll need to pay 10% down.
Credit Score and Income Guidelines
FHA loans also have more lenient credit score guidelines. You need a minimum credit score of 500 for an FHA loan. But, to qualify for the 3.5% down payment, you need a score of 580 or higher. Lenders also look at the rental income from other units when checking your debt-to-income ratio. This can help meet the income requirements.
Property Occupancy Rules
When buying a multifamily property with an FHA loan, you must follow the owner-occupancy requirement. You must live in one of the units as your primary residence within 60 days of closing. You need to stay there for at least one year. This rule ensures the property is used as a primary residence, not just for investment.
Understanding the FHA loan process for a multifamily property purchase can be tricky. But knowing the key requirements can help investors use this financing option. By looking at the FHA down payment, credit score guidelines, and owner-occupancy rules, buyers can start their multifamily investing journey with FHA financing.
Understanding FHA Loan Limits and Property Standards
When you buy a multifamily property with an FHA loan, knowing the loan limits and property standards is key. The Federal Housing Administration (FHA) sets these rules. FHA loan limits change each year and vary by county. This lets buyers in different areas find properties they can afford.
In 2024, FHA loan limits go from $498,257 for a single-family home to $3,317,400 for a four-unit property in expensive areas. These limits help many borrowers get FHA loans. They make it possible to buy properties that meet FHA’s strict standards.
The FHA appraisal checks the property’s value and safety. It looks at the home’s condition, lead paint (for homes built before 1978), and if it’s livable. Meeting these standards is important for getting an FHA loan. It also makes sure your investment is safe and reliable.
| Property Type | FHA Loan Limit (Low-Cost Areas) | FHA Loan Limit (High-Cost Areas) |
|---|---|---|
| 1-Unit | $498,257 | $1,149,825 |
| 2-Unit | $637,200 | $1,474,800 |
| 3-Unit | $771,150 | $1,782,375 |
| 4-Unit | $958,950 | $2,212,700 |
Knowing FHA loan limits and property standards helps buyers make smart choices. It ensures a smooth and successful investment in a multifamily property.
Alternative Financing Options for Multifamily Properties
FHA loans are a good choice for buying multifamily properties. But, there are other financing options too. Conventional mortgages and commercial loans can help investors grow their real estate portfolios.
Conventional Mortgages vs FHA Loans
Conventional mortgages need a down payment of 15-30%. This is more than FHA loans’ 3.5%. But, they might offer better interest rates and mortgage insurance terms. Investors with good credit and financial health might prefer conventional loans over FHA.
Commercial Lending Options
For big multifamily projects or commercial properties, consider commercial mortgages. These loans focus on the property’s income, not the borrower’s credit. They have higher rates but offer flexible terms and bigger loan amounts for the right buyers.
Mixed-Use Property Considerations
Mixed-use properties, with both homes and businesses, have special FHA loan rules. FHA loans need at least 51% of the property to be homes. Investors in mixed-use properties should check FHA’s rules or look at other loans like jumbo loans or commercial loans.
FAQ
What Qualifies as a Multifamily Property?
FHA calls properties with less than 5 units single-family. Those with 5 or more are multifamily. But, FHA mortgage programs allow homes with up to 4 units. Eligible properties include high-rise buildings, condominiums, and mixed-use buildings.
What Types of FHA Multifamily Financing Options are Available?
FHA offers loans for buying, rehabbing co-ops, and condos. These loans have lower interest rates and easier approval. You can also include renovation costs in the mortgage.
What are the Benefits of FHA Multifamily Loans?
FHA loans have good terms like low down payments and competitive rates. They’re for owner-occupiers, not commercial investors. You can use them for properties with up to four units.
What are the Key Requirements for FHA Multifamily Property Purchase?
FHA loans need a $1 million minimum and a 10% down payment. Loan fees can be up to 1%. Closing costs are 2% to 5% of the loan amount.
The debt-to-income ratio is 67%. You need 3 to 9 months of cash reserves. Credit scores start at 580, but 500 is okay with a 10% down payment. You’ll need to show income with W-2s, 1099s, tax returns, and a special appraisal for rental income.
What are the Down Payment Requirements for FHA Multifamily Loans?
FHA loans need a 3.5% down payment for scores of 580 or higher. For scores between 500-579, it’s 10%. Rental income from other units is considered in income guidelines.
The borrower must live in one unit as their primary residence within 60 days of closing. They must stay there for at least one year.
What are the FHA Loan Limits and Property Standards?
FHA loan limits change by county and are set annually. In 2023, they range from $472,030 for a one-unit home to $907,900 for a four-unit home in low-cost areas. For high-cost areas, limits go up to $1,089,300 for a one-unit home and $2,095,200 for a four-unit home.
Properties must pass an FHA appraisal. This checks value and safety. Special rules apply to properties built before 1978 because of lead paint hazards.
What are the Alternative Financing Options for Multifamily Properties?
Conventional mortgages for multifamily properties require 15-30% down payments. They may offer better interest rates and mortgage insurance terms. Commercial mortgages are tied to businesses and have higher interest rates due to more risk.
For mixed-use properties, FHA loans need at least 51% residential use. Other options include jumbo loans for properties over local limits and commercial loans for large developments or non-residential properties.
Source Links
- What Are FHA Multifamily Loans And Who Is Eligible?
- FHA Multifamily Loan: What All You Need to Know – BFPM
- FHA Loans for Multi-Unit Homes
- What Is An FHA Multifamily Loan?
- Can I Get an FHA Home Loan for a Multi-Unit Property?
- What Is an FHA Multifamily Loan and What Is It For?
- Can You Buy a Multifamily Property With an FHA Loan?
- Buying a Multi-Unit Home With an FHA Mortgage
- 2024 FHA Limits
- Federal Housing Administration (FHA) Loan: Requirements, Limits, How to Qualify
- FHA Loan Limits 2024 | Direct Mortgage Loans
- Everything You Need to Know About Multifamily Financing | Trion Properties
- Financing a Multifamily Property in 2022: Everything You Need to Know – Sage Real Estate
- What Are FHA Multifamily Loans and Their Eligibility Criteria?
