FHA loans are generally meant for single-family, owner-occupied properties. In other words, this financing option is designed for people who will purchase their own personal home, not for investors who want to purchase a rental property.
But you can use an FHA loan for multiunit properties.
Although there are limitations, these loans are perfectly viable options for starting your investment-property portfolio. Understanding the advantages, disadvantages, and specific details will help you make the right choice for these loans.
For rental properties, multiunit purchases bring a wide list of benefits compared to single-family residences. Most of all, you have the chance to place four different units into the rental market. Assuming you are not living on the property (which will be required with an FHA loan, see below), you can have four rent checks coming in every single month.
Not only does this mean more income, it also means less chance for 100% of the property to be unoccupied. Think about it: when you have a single-family property as a rental, if it sits unoccupied you are getting absolutely no income. However, if you have four units and one is unoccupied, you are still generating 75% of the income potential.
Purchasing a multiunit property with an FHA loan also gives you the chance to buy an investment property and your own home at the same time. You can get a unit where you live and get at least one, or as many as three, units for the rental market.
Using an FHA Loan for Multiunit Properties
Note: Rules and Regulation Change Constantly
This article is written with the most accurate information currently available, but rules and regulations change and numbers cited may not be perfectly accurate. For current and accurate information on loan limits, general requirements, and other factors, you need to contact a lending professional.
Why Use these Loans for Multiunit Properties?
As a homeowner, as an investor, as someone interested in purchasing properties of any kind, you’ll have many loan options. So why should you choose an FHA loan? These loans have numerous benefits, but most importantly, they allow for a low downpayment, especially compared to other investment-property loans.
With an FHA loan, you can secure financing with a downpayment as low as 3.5%. Compared to other loans, this can mean an extremely low initial cost of homeownership. Suppose you are purchasing a four-unit property for exactly $1 million, a price that would qualify for FHA financing. If you needed a downpayment of, say, 15%, this would mean you have to bring $225,000 for the initial purchase. However, if you qualify for 3.5% financing, you would only need $52,500.
For this reason, FHA loans can be extremely useful for a wide variety of borrowers. There are other advantages as well. The credit requirements can be fairly generous, especially compared to other loans for income-generating properties.
What About 0%-Down Options?
Yes, there are other options that allow for 0% financing on multiunit loans. But these are much more restricted in who can use them and what properties can be purchased. When discussing 0%-down loans, the two most common are VA and USDA loans. However, VA loans are only available to qualifying veterans and their family members, while USDA loans are only an option for purchasing houses in select rural and suburban area.
For many people, these loans are not available, so FHA loans, which have less restrictions, become the next best option.
Requirements for Using an FHA Loan on a Multiunit Property
FHA loans, like all other forms of financing, have specific requirements for borrowers. They are fairly easy and light, and generally aren’t more restrictive as far as downpayments and credit scores.
The Big Requirement: Living on the Property
As we noted above, FHA loans are designed specifically for homeowners, not investors. But they allow you to purchase a multiunit property. If you use this type of loan for your purchase of a multiunit property, you’ll need to meet one very specific and important requirement: you have to live on the property for a certain period of time.
That’s right, if you purchase a multiunit property, you have to move in.
But not forever.
For these purchases, you have to move into the property within 60 days of making the purchase, and you have to occupy it for at least one year after you buy. And it can’t be a home you live in every once in a while; it has to be your primary residence. This means that you have to occupy the home for for at least 51% of the time. So it can’t be a vacation property or secondary home.
No More Than Four Units
Another requirement, although this applies to the property being purchased and not to you, the borrower, is that it can only be four units or less. Duplexes, triplexes, and four-unit properties are all options for purchase if you are using an FHA loan on a multiunit property. However, a property with five separate units will not qualify for purchase with an FHA loan.
Note: Single-Family, Multiunit Lender Standards Will Vary
It’s worth noting that these requirements are essentially the bare minimum for FHA loans, but many lenders may have requirements above and beyond these standards. For example, FHA loans are available with a downpayment as small as 3.5% but certain lenders may have higher requirements; they may require a 5% downpayment even if you qualify, as far as the FHA is concerned, for the 3.5% downpayment.
For this reason, it’s still important to shop around with various lenders to determine which groups can offer the best terms for your specific needs.
Outstanding Support for Your Multiunit Purchase
If you are looking for an affordable FHA loan for your next loan, contact our staff today. We have a large inventory of top-quality loans, including options for multiunit homes, investment properties, vacation houses, and more!
We’d be proud to help you purchase a world-class rental property using an FHA loan.