An Ultimate Guide to FHA Multifamily Loan

Looking to buy a multifamily home but falling short on capital? Well, if you intend to live in one unit and rent out other units for profit, you could consider an FHA Loan for multifamily properties. An FHA Multifamily Loan is a mortgage loan issued by a lender and guaranteed by the Federal Housing Administration (FHA). It can be used to purchase a home of five or more units. These loans are subject to FHA loan restrictions and eligibility criteria. Let’s understand these in detail. 

What Constitutes A Multifamily Property According To The FHA? 

Even though technically the FHA defines properties having less than 5 units as single-family properties, and properties having more than 5 units as multifamily properties, under the traditional FHA mortgage program, you can purchase a home with up to 4 units. Properties eligible for FHA multifamily loans are typically properties such as high-rise buildings with elevators, condominiums, and mixed-use buildings with residential and commercial spaces. But, can you also buy a duplex with an FHA loan? The answer is yes. You just need to fulfill the following criteria:   

• You, as the borrower, must stay on the property and it should be your primary residence for at least one year. 
• You must move to your primary residence within the time limit specified by the lender. 
• The property must have up to 4 living units. 
• Your property must meet the FHA standards. 

Types Of FHA Multifamily Loan Options: 

FHA loans have lower interest rates than traditional mortgages and require a down payment. These loans are different from standard FHA mortgages and it can be difficult to find a lender who offers them. The United States Department of Housing and Urban Development (HUD) can help you with buying a multifamily home with an FHA loan. Following are the three types of FHA Loans for multifamily properties: 

FHA Multifamily Acquisition Loan: 

This loan is best for most borrowers as it is used to purchase or refinance existing multifamily buildings. 

FHA Multifamily Construction – Rehab Loan For Co-Ops: 

Looking to build or renovate cooperative housing units? Then this loan type is the best for you. You can use it to build or renovate properties like senior care facilities or low-to-moderate-income housing. 

FHA Multifamily Construction – Rehab Loan For Condos: 

This is perfect for you if you are thinking of building or renovating condominiums. 

FHA Multifamily Loan Requirements 

The following are the terms, and requirements for applying for an FHA multifamily loan: 

• Loan amount – $1 million and up 
• Minimum down payment – 10% 
• Loan origination fees – up to 1% of the loan amount 
• Closing costs – 2% to 5% of the amount borrowed 
• Funding time – 60 to 180 days 
• Maximum debt-to-income (DTI) ratio – 67% 
• Cash reserves – 3 to 9 months 
• Maximum loan amount per unit (a non-elevator building) – $54,892 for zero bedrooms and up to $101,352 for four or more bedrooms 
• Maximum loan amount per unit (a building with an elevator)- $64,026 for zero bedrooms and up to $123,193 for four or more bedrooms. 

Your lending bank might also consider other factors such as whether you, as the borrower, have been a landlord in the past, what the local ordinances are for landlords, and the time and money commitment you are ready to make for renting out the property. 

FHA Multifamily Loan Limits 

FHA loans impose restrictions on loan amounts, which are determined based on the county where the property is situated. These limits vary between low-cost and high-cost counties. Below are the FHA loan limits applicable till 2023: 

Conventional loan limits tend to be higher. For example, in a low-cost county, these limits range from $726,200 for a single-unit home to $1,396,800 for a four-unit home. In high-cost counties, FHA loan limits align with conventional loan limits, but with elevated property values, borrowers might find themselves needing a larger down payment or borrowing more to acquire a home. 

Can You Buy a Multifamily Home with an FHA Loan 

An FHA loan is commonly utilized to purchase a primary residence intended for year-round occupancy by the owner. Typically, the Federal Housing Administration (FHA) only supports financing for properties meeting the criteria of a single-family home. 

It is crucial to recognize that the U.S. Department of Housing and Urban Development (HUD) characterizes a “single-family” dwelling as one containing anywhere from one to four units. 

FHA Multifamily Loan Guidelines 

To purchase a multifamily property with a maximum of four units, individuals must apply for an FHA residential loan. While this type of property falls under the single-family category according to HUD guidelines, it can accommodate multiple families in its separate units. 

To qualify for FHA financing and comply with its primary residence requirement, the borrower must reside in at least one of the units within the property, while the remaining units may be leased out. 

Residing in the property you are renting out, often termed “house hacking,” offers a financially prudent entry into real estate investment. However, it’s important to note that this strategy may not suit everyone. It’s essential to carefully consider your objectives and requirements before pursuing this avenue. 

The Pros and Cons of Using FHA Loans to Buy Multifamily Homes 

Utilizing an FHA loan to acquire a multifamily residence comprising up to four units could offer advantages for prospective homebuyers, yet careful consideration of the associated pros and cons is essential. 

Pros: 

1. More Readily Approved: Since FHA loans are guaranteed by the U.S. government, lenders are more inclined to extend loans to individuals who may have faced challenges meeting conventional mortgage prerequisites due to prior credit issues. 
2. Lower Credit Score Requirements: FHA loans necessitate a credit score of 580 or above, or a minimum score of 500 if a 10% down payment is feasible. This requirement contrasts significantly with the conventional loan threshold of a minimum 620 credit score. 
3. Reduced Down Payment: FHA loans permit a down payment as low as 3.5%, and eligibility for down payment assistance programs from state housing financing agencies may also apply. 
4. Inclusive Eligibility: Unlike Department of Veterans Affairs (VA) loans, which mandate proof of military service, or U.S. Department of Agriculture (USDA) loans, which limit purchases to eligible rural areas, FHA loans are accessible to all applicants, regardless of location. 

Cons: 

1. Mortgage Insurance Premium (MIP): FHA loans necessitate borrowers to pay both an upfront and annual mortgage insurance premium, thereby augmenting the long-term borrowing costs. 
2. Tougher Appraisal Process: FHA loans require the use of an FHA-approved appraiser, making the appraisal process potentially challenging due to the scarcity of FHA-approved appraisers and the strict standards imposed. 
3. Higher Interest Rates: While FHA loans offer competitive interest rates based on credit scores, borrowers with higher credit scores may encounter comparatively higher interest rates than those offered by conventional loans. 

Other Multifamily Loan Options 

FHA loans represent just one of several choices available to real estate investors. Find out the alternative loan possibilities outlined below: 

1. Traditional Loan: A traditional loan allows you to purchase either a single-family property (ranging from one to four units) or a multifamily property (consisting of five or more units) for investment purposes. Unlike FHA loans, residency in one of the units is not mandatory. However, conventional loans typically require a down payment ranging from 15% to 30% of the property’s purchase price, influenced by factors such as the number of units and property usage. Opting for a larger down payment can exempt you from private mortgage insurance (PMI) and potentially secure a lower interest rate compared to FHA loans. 
2. Jumbo Loan: Jumbo loans cater to the financing needs of properties surpassing local loan limits. These loans typically entail higher credit scores and down payment prerequisites, alongside elevated interest rates. If considering a jumbo loan, it is advised to evaluate the long-term financial implications. 
3. Commercial Loan: Commercial mortgages facilitate the acquisition of business-related properties like storefronts, shopping centers, or corporate headquarters. Due to the reliance on property-generated profits for loan repayment, lenders often impose higher interest rates. Aspects such as pedestrian activity nearby could also impact the lender’s evaluation of potential revenue streams. 

Conclusion 

Typically, only owner-occupied investment properties qualify for an FHA loan. You can purchase a larger property with five or more units using FHA multifamily financing if the purchase qualifies under the FHA’s exceptions to the owner-occupied rule. If the property you are interested in meets FHA multifamily requirements, you may qualify for financing. Otherwise, you may need to consider alternative loan options or a smaller property. 

For any queries related to multifamily properties or property management, reach us at BFPM.