What Is An FHA Multifamily Loan?

If you’ve been thinking about becoming a landlord and buying a house with several units, you may be wondering what options you could use to finance such a property. One option potentially available to you is an FHA multifamily loan. These loans are good options for those looking to earn rental income by buying commercial real estate.

Let’s take a closer look at what FHA multifamily loans are, as well as what the alternative loan options are for those looking to buy a smaller investment property.

FHA Multifamily Loan Definition

An FHA multifamily loan is an FHA loan that is backed by the Federal Housing Administration and secures the purchase of a multifamily property. According to the eligibility requirements set by the Department Of Housing And Urban Development (HUD), an FHA multifamily loan may be obtained for the purchase of a home that has five units or more.

Owner-occupied multifamily housing buildings containing four units or less are technically considered to be single-family residences, even if the extra units are being leased out to renters. Borrowers looking to purchase a home with four units or less may finance the property using a traditional FHA mortgage.

Since most homebuyers are looking for properties with two to four units, rather than a large apartment complex, the remainder of this article will focus on the unique requirements and considerations of buying a multiunit, single-family home using a traditional FHA loan.

Requirements Of FHA Loans For Multiunit Properties

As noted, FHA multifamily loans may not be used to finance a single-family home containing four units or less. These loans are intended for large properties with many units. If you just want to purchase a property with 1-4 units, you instead may use a traditional FHA loan to finance a such a property since it’s technically considered a single-family home. As such, many of the loan requirements are the same when purchasing a multiunit piece of real estate as they are when purchasing a traditional home using an FHA loan. However, there are a few unique considerations:

• Income: With a multiunit property, the potential rental income of the additional units is considered when you apply for the loan. If the real estate you’re considering has three or four units, the potential income must be equal to or greater than your monthly mortgage payment, plus 25%. The 25% is added to account for time when the property may be vacant, either because you’re between tenants or because necessary repairs must be made. To factor in this potential income, an appraiser will determine the fair market rate of the units to be occupied.

• Credit score: As with a single-unit property, you’ll need a credit score of at least 580 to qualify for an FHA loan. Lenders will also look at your debt-to-income ratio. Ideally, you’ll want a DTI of 45% or lower, although an FHA lender may approve you for a loan with a higher DTI if you also have a higher credit score or other favorable factors.

• Owner-occupancy: One of the major differences between FHA loans for multiunit single-family homes and those used for commercial multifamily properties, such as apartment buildings, is that at least one of the units in the building must be owner-occupied. That means you must call at least one of the units your home for a majority of the year.

• Down payment: FHA loans allow for a down payment as low as 3.5%, which is why they’re attractive to many first-time home buyers. This is true whether you’re financing a single-unit or multiunit (up to four units) property.

• Mortgage insurance premiums: FHA loans require that mortgage insurance premiums (MIP) be paid upfront as part of the closing costs, as well as monthly for at least 11 years, even after you’ve built 20% equity in the home. Depending on the size of your down payment, you may be required to pay MIP for the life of your loan.

FAQs About FHA Loans For Multifamily Properties

What are the loan limits for buying a multiunit property with an FHA loan?

FHA loan amount limits are set by the county, and that’s true whether you’re buying a single-unit or a home with several units. However, these set loan limits increase with every additional unit. The limits listed above are accurate as of 2022. To see what the most recent loan limits are for multiunit properties in the area you’re looking to buy, consult HUD’s FHA mortgage limits guide.

Can I buy a duplex with an FHA loan?

Yes, because a duplex is considered a single-family home, you may use an FHA loan to finance your purchase, provided you use one of the two units as your primary residence.

Can I use an FHA loan for a mixed-use property?

FHA home loans allow for mixed-use properties, so long as at least 51% of the square footage is being used for residential purposes. This is true whether the home has one unit or multiple units.

The Bottom Line

Using an FHA loan to buy a multiunit property can be a great option for those looking to become a landlord for the first time, since they allow for a low down payment and come with low interest rates as compared to many other loan types. However, the home must be owner-occupied and cannot contain more than four units. If you’re interested in investing in a property with more units, you’ll need to consider a true FHA multifamily loan instead.

Whether you’re looking to buy a single-unit home, a multifamily home, or another property type, our experts are here to help guide you through all of your financing options. Take the first step on your home buying journey and apply for preapproval today.