Can You Buy a Multifamily Home With an FHA Loan?

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Quick Summary

  • An FHA loan can be used to purchase any multifamily home of up to 4-units.
  • FHA loans make purchasing property as a first-time buyer a lot easier since they require a significantly lower down payment and credit scores as low as 500.
  • An essential requirement for getting approved for an FHA loan for multifamily homes is that you have to reside in the property you plan on purchasing for at least 12 months.

can you buy a multifamily home with an fha loan

With a flexible credit score and lower down payment options, FHA loan requirements beat the intimidating demands of conventional financing loans. That’s why it’s no surprise that people naturally want to know if they can buy a multifamily home with an FHA loan.

In this article, we’re going to shed more light on FHA loans and how they can be used for purchasing multifamily homes. We’ll talk about their standard requirements so you’ll know exactly how to get approved.

We’ll also highlight the multiple applications of an FHA loan; its advantages, and how you can get started on the journey to get one yourself. After reading through you should be able to make an informed decision, and ultimately save up on the cost of buying a house.

FHA Multifamily Loan Requirements

To qualify for an FHA multifamily loan you need to meet certain standard requirements that are set by the Federal Housing Administration (FHA). The FHA is a government-backed agency that provides mortgage insurance on loans that are made by FHA-approved lenders.

Unfortunately, there is a bias that this type of loan is meant specifically for first-time home buyers, but this couldn’t be further from the truth. Many second and even third-time home buyers have benefited from this loan type.

Here are the requirements of an FHA multifamily loan:

  1. Credit score: FHA loans for multifamily homes require you to have a minimum credit score of anywhere between 500-580. While this may differ and is grossly dependent on lender overlays, some FHA loans have programs for people with no credit score at all. These programs might require documentation of previous insurance payments, rent history, or cellphone bills in place of a credit score.
  2. Down payment: For credit scores at or above 580 a downpayment of 3.5% is required but, if you go below that, say between 500-597 your downpayment increases to 10%.
  3. Mortgage insurance: Unlike conventional mortgage systems, FHA loans require you to pay two types of insurance to protect the lenders. The first payment is the upfront mortgage insurance premium (UMIP) and the second is the annual mortgage insurance premium (MIP).
  4. Debt-to-income ratio: FHA guidelines allow a total debt-to-income (DTI) ratio of 43%. But this can be overlooked for candidates with strong credit scores and greater cash resolves. Having a good DTI score could increase your chances of getting your loan approved.
  5. Home occupancy: FHA loans for multifamily homes require you to live in the property for at least a year. Borrowers are usually checked up on by the Department of Housing and Urban Development (DHU), to ensure they’re following the occupancy rule.
  6. Proof of employment: You must have a steady source of income or proof of employment before applying for an FHA loan.
  7. FHA appraisals: For your home to qualify for an FHA loan it needs to pass the FHA appraisal test. Usually, an FHA appraiser just goes to the house to check for structural soundness and general safety.

Even though the FHA has set standard rules to get you approved for loans, each lender might add customized overlays. Ensure you do adequate research and effectively communicate with your lender before jumping into a deal.

Can I Buy a 4-Unit Building With an FHA Loan?

can i buy a 4unit building with an fha loan

Yes, you can purchase a four-unit building with an FHA loan. The good part is that even though this type of loan is primarily an owner-occupied loan, you aren’t required to live in all four units that make up the fourplex. Instead, you’re permitted to rent out the other 3 living units while you reside in one and act as the landlord.

It’s important to point out that even though you are allowed to rent out the other units in a quadplex, this type of property should not be used for commercial purposes like a hotel or bed-and-breakfast as it violates the guidelines of this type of loan as stated on the FHA official site.

How Many Units Can You Buy With an FHA Loan?

how many units can you buy with an fha loan

According to the Federal Housing Administration, you can use an FHA loan to buy a house that has anywhere between 1 to 4 living units. As long as you’re following their guidelines you can use this loan type to buy any eligible property. However, you have to ensure:

  • The housing units purchased are not for investment properties but will serve as primary residences.
  • You only use one FHA loan to finance one property at a given time.
  • The housing units do not exceed four.

Can You Buy an Apartment Building With an FHA Loan?

You can use an FHA loan to purchase an apartment as long as the housing units fall in line with FHA guidelines. You’ll be required to make the apartment your primary residence for at least a year and move into the building within 30 to 60 days of the purchase.

The only way around this mandate is if the said apartment isn’t conducive enough to serve as a living space. In this case, an FHA 203k loan which can be used to finance home fixer-uppers might be required.

How To Get an FHA Multifamily Loan

With down payments as low as 3.5% and flexible credit score requirements getting an approved FHA loan for a multifamily home is possible, even for the “subprime”.

Here are 4 simple steps you should follow:

  1. Meet the loan requirements: Before you decide to actively pursue this loan you have to go through the requirements and ensure you can qualify or at least stand a chance of getting your loan approved.
  2. Find a lender: After you’ve checked off all the requirements, it’s time to do your research and find an FHA-approved lender. You can get FHA financing from mortgage brokers, credit unions, and even banks so finding one won’t be hard.

Most lenders will ask you to provide basic details like your name, social security number, property address, and down payment amount.

  1. Apply for your FHA loan: Once you find suitable lenders, you can submit an application, usually online or through an e-mail. Since overlays vary with FHA lenders, ensure you submit multiple applications so you get a disparity in the offers you get back.
  2. Compare loan estimates: After you’ve reached out to your prospective lenders and they’ve all provided you with loan estimates, compare the estimates and try to pick one that’s best tailored to your need.

It’s ideal to request quotes from at least 5 lenders this way you have multiple sources to compare.

After comparing your choices, you’re left with the task of making the right choice and picking the right lender. This is not a decision you should rush into. take your time!

Make Use of This Great Opportunity

Life can be unpredictable and that’s why loans like these exist. This means even if you’ve suffered from foreclosure and bankruptcy or maybe you just haven’t saved up enough down payment to buy your first property, you can still plan toward using an FHA loan to buy a multifamily home.

The real estate market is getting a lot less competitive and now is a perfect time to buy your dream home. Even with a relatively low credit score, FHA loans still make becoming a landlord simple.

FAQs

What is The FHA Self-Sufficiency Test?

The self-sufficiency test helps you determine if the total amount you receive, in rent, from all the housing units is greater than or equal to the mortgage payment. If the estimated rent you could generate is less than the mortgage value, your property is not self-sufficient.

What Would Make a Home Not Pass an FHA Inspection?

A home might not pass the FHA appraisal test if after inspection it is found unsafe for living by the FHA appraiser.

Can You Buy 2 Houses at The Same Time With an FHA Loan?

No, you cannot buy two properties at the same time with an FHA loan, it is against the loan guidelines. However, if you’ve converted one of your FHA-owned homes into an investment property, you could refinance into a new one.

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