Can You Buy a Multifamily Property With an FHA Loan?

An FHA loan offers a pathway to homeownership by providing mortgage insurance on loans made by approved lenders. These loans are popular for their flexible qualification criteria, including lower down payment requirements compared to some conventional mortgages. It is possible to use an FHA loan to purchase multifamily properties with two to four units, provided certain conditions are met. A core principle for FHA multifamily loans is the mandatory owner-occupancy requirement, meaning the borrower must live in one of the units as their primary residence.

Borrower and Property Requirements

To qualify for an FHA multifamily loan, both the borrower and the property must meet specific criteria. Borrowers need a FICO credit score of at least 580 for a 3.5% down payment. A 10% down payment is required for credit scores between 500 and 579. Lenders also assess a borrower’s debt-to-income (DTI) ratio, which compares monthly debt obligations to gross monthly income. While FHA guidelines suggest certain maximums, some flexibility exists with compensating factors. Borrowers must demonstrate a stable employment history, generally showing two years of consistent work. Gaps in employment are permissible if adequately explained and documented.

The owner-occupancy rule mandates that the borrower resides in one of the units as their primary residence for at least one year. This means FHA loans cannot be used solely for investment properties. The property must adhere to the FHA’s unit count limitation, allowing only properties with two to four units, such as duplexes or triplexes. Properties must also meet the FHA’s Minimum Property Standards (MPS), ensuring they are safe and sound. An FHA-approved appraiser confirms the property meets these standards. A self-sufficiency test is applied, requiring that potential rental income from non-owner-occupied units, combined with the owner’s contribution, is sufficient to cover the mortgage payment, property taxes, and insurance. The property must also be legally zoned for multi-unit residential use.

Financial Aspects of FHA Multifamily Loans

FHA multifamily loans have specific financial requirements. A low down payment, typically 3.5% of the purchase price, is a key advantage. This percentage applies to one- to four-unit properties. Down payment funds can sometimes come from approved gift sources.

A Mortgage Insurance Premium (MIP) protects the lender in case of borrower default. This includes an Upfront Mortgage Insurance Premium (UFMIP) and an annual MIP. The UFMIP is a one-time fee equal to 1.75% of the base loan amount, often financed into the loan. The annual MIP is a recurring monthly charge, with rates varying based on loan terms and loan-to-value ratio. If the down payment is less than 10%, the annual MIP is generally required for the entire loan term. If the down payment is 10% or more, the annual MIP may be removed after 11 years.

FHA loan limits are higher for multifamily properties than for single-family homes. These limits are determined annually and vary by county and the number of units. Borrowers can find specific FHA loan limits on the Department of Housing and Urban Development (HUD) website.

Navigating the FHA Multifamily Loan Process

Securing an FHA multifamily loan involves several steps, starting with selecting an FHA-approved lender. Borrowers can find a list of these lenders on the HUD website.

The next step is pre-approval. The lender evaluates the borrower’s financial information to determine how much they can borrow. Pre-approval provides a clear understanding of borrowing capacity and helps streamline the property search.

Once pre-approved, the borrower searches for a suitable multifamily property. An offer can be made, often contingent on an FHA appraisal.

After an accepted offer, the loan proceeds to appraisal and underwriting. An FHA-approved appraiser assesses the property to ensure it meets Minimum Property Standards and determines its market value. For multifamily properties, the appraiser also performs the self-sufficiency test.

Concurrently, the loan enters underwriting, where the lender’s underwriter reviews all documentation. This verifies that both the borrower and the property meet FHA and lender guidelines, examining credit history, income, assets, and employment stability. The loan is cleared to close once all conditions are satisfied.

The final stage is closing, where all parties sign the necessary legal documents, such as the mortgage agreement and promissory note. Funds are disbursed, and ownership of the property is transferred to the borrower.