Getting started in investment real estate can be done with an FHA loan. Yes, it sounds extraordinary since FHA loans are for owner occupied properties. In this article, we’ll show you how you can secure a multi-unit property with FHA financing, making it easy to break into the real estate investment world.
The Number One Rule
There is one rule regarding FHA financing of a multi-unit property – you must live in one unit. You can purchase a 1, 2, 3, or 4-unit property, but you must live in one of them. In addition, each unit must have its own entrance, sleeping quarters, bathroom, and eating area.
If you live in one of the units as your primary residence, the remaining units can be rented out. It’s the only way you can get around the FHA rules of owner occupancy. In other words, you can enter the real estate investment world with as little as a 3.5% down payment! Compare this to the 20% or more that conventional loans require and you are in good hands.
Qualifying for the FHA Loan on a Multi-Unit Property
The good news is that qualifying for an FHA loan on a multi-unit property works just like it would on a single-family home. You must meet the minimum FHA guidelines.
This means a credit score of at least 580 and debt ratios no higher than 31/43. Your income and employment should be consistent and stable. You cannot have any bankruptcies 2 years or foreclosures in the last 3 years. Your credit history should be stable. Your credit score does not have to be ‘high,’ just decent.
FHA lenders can add their own requirements to the FHA’s rules, though. Lenders fund the loans. The FHA just insures them. In other words, if you default, the FHA will pay the lender back the money that they lost. This is why you pay annual mortgage insurance on your loan. Because lenders fund the loans, though, they can increase the credit score, lower the debt ratio maximums, or require other unique factors.
The largest hurdle when buying a multi-unit property is qualifying for the higher mortgage payment. You must meet the debt ratio requirements. In most cases, you cannot use ‘potential’ rent payments as a part of your income. Some lenders may grant an exception if you have experience as a property owner. If you can prove you have experience finding renters and collecting rent, a lender may use rent as a compensating factor.
If you plan to use the rent to qualify, you’ll need signed leases before you close on the loan. This, along with your history as a landlord, can serve as a compensating factor. If your debt ratio is near the maximum allowed, this can help you secure an approval.
The Benefit of FHA Loans on Multi-Unit Properties
FHA loans can help you get started on your real estate investment dreams. Even though the unit is technically owner occupied, you still collect rent. This rent can offset the mortgage payment, helping you pay the loan down faster. If you don’t have a mortgage payment, you can save money and buy other houses for investment purposes.
One of the largest benefits of the FHA loan on a multi-unit property, however, is the lower interest rate. FHA loans are known for their low rates and low fees. When you use conventional financing for an investment property, you generally pay a slightly higher interest rate and elevated fees. This helps the lender offset the risk of an investment property loan. FHA loans do not increase the rate for the investment property because they consider it owner occupied.
The Downside to FHA Financing for Multi-Unit Properties
One downside of FHA financing for multi-unit properties is the FHA loan limits. Depending on where you live, you may have a low maximum loan amount allowance. Each county has a different limit. You can view the limits here.
The FHA bases the limits on the average housing price in your area. If you live in a low housing price area, you may have a maximum of the FHA floor. Today, that amount is $275,665. This could make it difficult to secure a multi-unit property. However, if you live in a high cost area, you may be able to borrow as much as $636,150. Most areas have a maximum loan amount that falls somewhere in between these two amounts.
The FHA loan can be a great way to buy multi-unit properties. Do your homework and determine which lender has the best deal for you. Remember, lenders can add their own requirements onto loans. You may find lenders that have strict requirements for these properties because they want to discourage the purchase of rental properties. There are plenty of lenders out there that offer FHA financing on 1-4 unit properties. Find the one with the best rate and fees and enjoy your life as a landlord!