Thinking about a multi-unit property? You can finance it with FHA

by Gina Pogol
February 8th, 2011

FHA mortgages confer several advantages when used for 2-4 unit properties.  By purchasing a duplex, tri-plex, or four-plex, you can use FHA financing for rental housing. Here are some important considerations:

You have to live in one of the units

FHA is not in the business of guaranteeing mortgages for investors. But it has no problem with people who purchase multi-unit property as primary residences.

Your mortgage limits are higher

For example, in California’s Placer County, the FHA mortgage limit for a single family home is $580,000.  However, the limit for duplexes is $742,500, triplexes is $897,500, and fourplexes is a whopping $1,115,400. And yes, as long as you don’t need a non-occupying co-borrower you can still finance 96.5 percent.  I can’t think of any other way to finance investment property at that loan-to-value ratio.

Understand though that there are some limitations on these maximums. Three- and four-unit properties, regardless of occupancy status, must be self-sufficient (i.e., the maximum mortgage is limited so that the ratio of the monthly mortgage payment divided by the monthly net rental income, does not exceed 100 percent). The calculation is made by taking the appraiser’s estimate of fair market rent from all units, including the unit chosen by the borrower for occupancy, then subtracting the appraiser’s estimate for vacancies or the vacancy factor used by the jurisdictional Home Ownership Center (usually this is about 25 percent).

Your appraisal requirements are different

You have to have an appraisal for 2-4 unit properties, which will probably cost you significantly more than a standard form 1004 appraisal. In addition, your appraiser will complete a schedule of rents, researching market rents in the area and projecting the probable income of the property. When a property is purchased as an income producer, the income it is capable of producing influences the appraised value. In addition, if you need the rental income to qualify for the purchase, the appraiser will have to estimate what that income will be.

You don’t get credit for all the property’s income when qualifying

Your rental income for two- to four-unit properties is calculated using the following formula:

The projected rent of the rental units  may be considered gross income only after deducting the vacancy and maintenance factor.  The money is added to your income rather than offsetting your mortgage payments. This is a less favorable treatment than some lenders use — directly offsetting mortgage payments with rental income allows you to qualify for a larger mortgage and more expensive property.

Your reserve requirements may be higher

For three- and four-unit properties, you must have at least three months of PITI in liquid funds after closing. These funds cannot be a gift.

Real estate is very cheap in many parts of the country, and demand for rentals is up. A multi-unit property purchase could be a very smart investment today.

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