FHA Multi-Unit Properties: The Federal Housing Administration, or FHA, makes it possible for a lot of first-time home buyers and buyers, in general, to afford properties when they have difficulties trying to finance their dream home. One of the main reasons borrowers end up with FHA loans rather than conventional loans is because of lower credit scores. If you do not have excellent credit, you may end up getting an FHA loan.
However, having an FHA loan comes with great benefits as well. Such as the FHA Multi-Unit game. You can either use the FHA Multi-Unit loan to purchase a property with as little as 3.5% down or you can acquire an existing investment property with at least 10% down. There are certain kickers to each scenario.
House Hacking
Everyone has probably heard of the term, “House Hacking”. It’s simply buying a duplex, triplex, or quadruplex, then living inside one of the units and renting out the rest so that you pay little to nothing on the mortgage. Or better yet, you generate income on the property.
House Hacking works perfecting on FHA Multi-Unit Properties. If you find a great deal on a 2-, 3-, or 4-unit property that brings in great revenue generation, you can qualify for the 3.5% down payment program for first-time Homebuyers.
This program does have a few requirements such as good credit, a debt-to-income ratio of less than 43%, and a down payment of 3.5%, which is great. Normally you would think a much larger down payment (20%) would be required in this circumstance. But the FHA and HUD (Department of Housing and Urban Development) approved this program.
Another reason is in comparison to conventional loans, FHA loans have come up with more ways to help first-time homebuyers. The program was initially established to help first-time home buyers find home ownership. Coming up with a 20% down is not very easy in society today.
If you are buying a multi-unit as a first-time homebuyer and attempting to do some ‘house hacking’… you must complete your due diligence and make sure everything is in good working order as far as the property.
- All kitchens are in good condition and working order.
- All units have a working HVAC system and furnace.
- All units have a proper water heater.
- All units have an entrance and exit.
- All bathrooms are in good condition and working order.
- The roof, siding, gutters, and overall structure is in good condition.
- None of the units have anything that can be of any harm to you or any potential tenant.
Of course, this will all be done during the inspection. But you still have to account for everything while making the investment. Think of yourself as a homeowner but also an investor. Would you purchase a 4-unit multifamily building with major issues?
Multifamily Rental Housing
Then there’s multi-family rental housing. According to HUD, everyone is qualified to participate in this investment program, whether you’re a large corporation, non-profit, or just an individual. These types of multi-units must have at least 5+ units.
As far as the financing, investors must come up with at least 10% down, with the bank financing 90% of the loan depending on the circumstance.
There are also other parameters according to HUD. All units must have complete kitchens, no critical repairs must be necessary, and the mortgage term cannot exceed 35 years or 75% of the property. Why would they finance a large apartment building requiring significant repairs?
A lot of investors do not realize this, but apartment buildings, high-rise buildings, and multi-use under certain conditions can qualify for FHA’s multifamily financing. As long as they’re mainly used for residential space. You can also use this for construction loans or rehab financing. There are a lot of options for this type of financing available from HUD.
The only downside to these types of loans is them being a little more difficult to find the right lender to work with. Most mortgage lenders want to work with your normal everyday loan that’s just a single-family house and an easy deal to close. These deals tend to be a bit more complicated but pay much higher dividends in the end.
At the end of the day, these are insured by the FHA and can be a great way to finance your multi-unit properties. Whether you are going to invest in an apartment building or just a 4-unit house and live in one of the units.
