FHA loans can allow you to purchase a property with lower credit and down payment requirements, saving you money upfront. Naturally, if you’re looking to get into real estate investing or purchase a large, multi-unit property, you may want to take advantage of these less-rigid requirements. However, FHA restrictions and differing definitions of a “multifamily home” could make finding financing options more complicated for an investor.
One of these options, an FHA multifamily loan, may be useful under certain circumstances. Let’s break down how this loan type works, the definition of a multifamily home, and other financing options.
You can and you can’t, depending on one’s definition of a multifamily home.
An FHA loan can be used to purchase a primary residence, meaning a property the owner intends to live in for most of the year. Typically, the Federal Housing Administration (FHA) will only back funding for properties that fit the definition of a single-family home (a home with up to four units). Many consumers, though, view multi-unit properties as multifamily homes because of the potential to rent to multiple tenants.
In the real estate world, a multifamily home is a residential property with five or more units, such as an apartment building, condo or townhouse. Under special circumstances outlined by the U.S. Department of Housing and Urban Development (HUD), you can obtain an FHA multifamily loan to purchase a property fitting the definition of five or more units.
Rocket MortgageⓇ doesn’t currently offer FHA multifamily loans for commercial properties, but to keep you informed, we’ll now break down the types of multifamily financing available from the FHA, and the lending processes involved.
The FHA will insure mortgage loans for the following types of for-profit and nonprofit multifamily properties:
If you’re looking to buy a multifamily home in the form of a property with no more than four units, you’ll only need to apply for an FHA residential loan. Typical lending requirements for an FHA loan include a credit score of at least 580 and a debt-to-income (DTI) ratio below 45% for the best chance of qualification. Lenders also typically require an appraisal of the property being purchased.
A benefit to buying investment property with an FHA loan is the smaller down payment – as low as 3.5%, regardless of the number of units. The downside is you’ll pay mortgage insurance premiums (MIP) for the life of the loan.
The catch to using an FHA loan to finance a multifamily investment property is that you, the borrower, must occupy at least one of the units. This makes the property your primary residence and can qualify it for FHA financing.
Living in the property you’re renting out, also known as house hacking, can be a financially savvy way to get started with real estate investing, but it’s not for everyone. You’ll want to consider your goals and needs.
The county a property resides in determines FHA loan limits. In lower-cost counties, the maximum FHA floor for the loan limit for a one-unit property is $420,680. In higher-cost locations, the upper end of the limits is $970,800.
It’s important to note that loan limits will be higher if more units are in the property.
FHA loans aren’t the only option for a real estate investor. Take a look at other loan options below.
You can use a conventional loan to buy a single-family (two to four) or multifamily (five or more units) property and use either as investment properties. Under a conventional mortgage, the properties don’t have to be your primary residence (meaning you don’t have to live in one of the units).
However, the down payment for a conventional loan can be 15% – 30% of the home’s purchase price, and the number of units and purpose for buying the property can affect that amount. The good news is that with a higher down payment, you won’t have to purchase private mortgage insurance (PMI) and you could see potentially lower interest rates than with an FHA loan.
Jumbo loans can provide financing higher than your area’s loan limits, but with this often comes higher credit score and down payment requirements, and a higher interest rate. If a jumbo loan sounds like it could be a good fit for your needs, it’s worth researching whether it will truly cost you more.
A commercial mortgage is typically used for purchasing business-related properties, such as a storefront, shopping center or company headquarters. Lenders usually charge higher interest rates on commercial loans because of the greater risk involved, as repayment will generally depend on the profits and success of the business. Another factor lenders may consider is the amount of foot traffic in the area as an estimate of a company’s potential business prospects.
A duplex is a property with two units usually separated by a shared wall. Since the number of units is within what qualifies as a single-family home, a duplex should be eligible for an FHA loan.
An FHA residential loan can be used for a primary residence with up to four units. For multifamily homes with five or more units, see the FHA Multifamily Financing Options section above.
Borrowers can typically only have one outstanding FHA loan at a time, but a second may be allowed under certain circumstances. Scenarios where you’re relocating and haven’t yet sold your home, you’re going through a divorce or you’re co-signing a loan for someone can allow you to have two FHA loans at once.
Typically, only owner-occupied investment properties qualify for an FHA loan. You can purchase larger properties with five or more units by using FHA multifamily financing under certain circumstances, as outlined above. If your plan for the property falls under FHA multifamily requirements, you may qualify for financing. Otherwise, consider other loan options or a smaller property.
To get started with an FHA residential loan, apply online today! You can also give us a call at (833) 230-4553.
Hanna Kielar is a Section Editor for Rocket Auto℠, RocketHQ℠, and Rocket Loans® with a focus on personal finance, automotive, and personal loans. She has a B.A. in Professional Writing from Michigan State University.