How to buy a multi-family property with an FHA loan

Quick insights

• The Federal Housing Administration (FHA) has multiple loan types that borrowers could use to purchase multi-family properties.
• Multi-family mortgage loan requirements vary depending on the number of units at the property.
• Loan limits in certain areas can affect the required down payment on an FHA loan for a multi-family building.

The FHA offers multiple loan solutions for multi-family homes. The options vary depending on the number of units in the building, general purpose and condition of the property. Read on to learn more about buying a multi-family home with an FHA loan and the benefits of using them.

Property requirements for multi-family FHA loans

There are several different types of FHA loans to use based on the number of units and the condition of the building.

Properties with four or fewer units

The traditional FHA mortgage program can be used to buy a property with up to four units if the owner uses it as their primary residence. Certain homebuyers use this option to buy duplexes, triplexes or fourplexes/quadplexes. They’d live in one unit and use rental income for the other units to cover (or partially cover) their mortgage costs. This article will primarily focus on this type of loan and use-case.

Properties with five or more units

The FHA also insures loans for larger projects, including both not-for-profit and for-profit enterprises. These loan types include (but are not limited to):

• FHA 221(d)(4) loans: Intended for rental and cooperative housing. These loans can help borrowers rehabilitate or construct properties with 5+ units. Buildings can be in a variety of styles, including detached, semi-detached, walkup, row or elevator-type. These loans can also be used for single room occupancy (SRO) projects, such as for assisted living residences.
• FHA 207/223(f) loans: Intended for the purchase or refinancing of multi-family rental housing. These loans allow borrowers to purchase properties with at least 5 units with complete kitchens and baths. These properties must have been completed or substantially rehabilitated at least 3 years before the date of the application.

Steps to buy a multi-family property with FHA

The process of application and approval varies depending on the type of multi-unit loan you are pursuing. Those pursuing a multi-family property with 5+ units will have to follow a rigorous review, including working with a specialized lender and submitting robust details about their plans. Those using a traditional FHA loan to purchase a property with four or fewer units have a comparatively straight-forward process, with some key differences from applying for a single-family home loan.

Step 1: Pre-approval with an FHA-approved lender

Mortgage pre-approval with an FHA-approved lender can help you prepare to make an offer while you’re in the process of house-hunting. FHA-approved lenders will consider several different factors when reviewing your application. Multi-family mortgage loan requirements may include:

• Creditworthiness: For a typical property, a credit score of at least 620 is generally preferred for FHA loan approval. When it comes to pursuing a loan for a more valuable multi-unit property, having a higher credit score may be beneficial.
• Financial history: Beyond your credit score, other aspects of your credit history may also be considered with your application. Those aspects often include your payment history, collections, foreclosures and bankruptcies.
• Proof of income: This is usually requested with any loan application. When purchasing a multi-unit property, a percentage of the projected rental income may also be reviewed with the income you report. The specifics and process can vary by lender—for example, some may require signed leases to verify your proof of income.
• Debt-to-income (DTI) ratio: In most cases, a DTI of 43% or lower is preferred for FHA loan approval.
• Assets: Financing a two-to-four unit property requires you have at least three months of mortgage payment reserves.

Step 2: Selecting a property that falls within FHA loan limits

FHA loans are restricted to certain amounts which vary depending on which county the property is situated in and the number of units. Counties with higher-cost real estate have higher limits than those with lower-cost properties, however these limits tend to be lower than conventional loans. To purchase a multi-family property with an FHA loan, it may be necessary to gather a larger down payment to work within the limits.

Step 3: FHA appraisal and safety inspections

An FHA-approved appraiser will need to visit the property, appraise it and confirm that it meets minimum health and safety standards. The appraisal process involves both determining the property’s market value and assessing its condition for safety, security and soundness. In some cases, it will be necessary to correct issues before an FHA loan for a multi-family home can be funded.

Problems an inspector may flag:

• Utility meters for each unit
• Structural damage
• Roof damage
• Loose handrails
• Peeling paint
• Asbestos

Benefits of using an FHA loan for a multi-family property

In general, FHA-insured loans can be a beneficial option when buying a multi-unit home. FHA-loan borrowers may benefit from:

• Lower down payment: One of the benefits of an FHA loan is a degree of flexibility on the down payment amount. In some cases, borrowers are required to put down a down payment of 10%.
• Lower interest rates: Interest rates for FHA loans can be lower than the rate on a conventional mortgage loan for the same property.
• Rental income: You may be able to calculate rental income as part of your total income for application purposes. Once you own the property and occupy it, rental income may help offset multi-unit property mortgage costs or even provide a profit. By purchasing a multi-family property, you can live in one unit and rent out the others.

In conclusion

For many looking to own and operate a multi-family property, a traditional FHA loan may be a solution when there are four units or less. Those who are pursuing grander multi-family properties, such as a large complex with five or more units, also have options through the FHA. When considering an FHA loan for a multi-family property, it can be helpful to reach out to a trained real Home Lending Advisor for personalized support.