How to Buy a Multifamily Property With an FHA Loan

An FHA multifamily loan provides an accessible path for individuals seeking to purchase a multi-unit property (two to four units) where they intend to reside in one unit. This financing option, insured by the Federal Housing Administration (FHA), allows buyers to combine homeownership with potential rental income from the additional units. Unlike loans for properties with five or more units, which are typically commercial, these FHA loans are designed for owner-occupants.

Key FHA Multifamily Loan Requirements

To qualify for an FHA multifamily loan, borrowers must meet specific financial and occupancy criteria. A minimum credit score of 580 is generally required to secure the standard 3.5% down payment, though some lenders may accept scores between 500 and 579 with a higher 10% down payment. Many private lenders, however, often prefer a credit score of at least 620. Lenders also evaluate a borrower’s debt-to-income (DTI) ratio, which compares monthly debt obligations to gross monthly income. Higher ratios can be accepted with compensating factors like significant cash reserves or a strong credit history.

A fundamental requirement for an FHA multifamily loan is the owner-occupancy rule, mandating that the borrower live in one unit as their primary residence for at least one year. The property must be a duplex, triplex, or fourplex to qualify under these FHA guidelines. Properties with five or more units fall under different FHA multifamily programs.

The property must also meet the FHA’s Minimum Property Requirements (MPRs) and Minimum Property Standards (MPS) to ensure it is safe, sound, and sanitary. An FHA-approved appraiser assesses the property’s condition, checking major systems like heating, plumbing, and electrical, as well as the roof, foundation, and overall structural integrity. Issues such as peeling lead-based paint, drainage problems, or wood-destroying insect infestations must typically be resolved before loan approval.

FHA loan limits vary by county and the number of units, reflecting local housing market values. These limits are generally higher for multi-unit properties compared to single-family homes and are adjusted annually. For 3-4 unit properties, a “self-sufficiency test” might apply, requiring 75% of estimated net rental income from non-owner-occupied units to be sufficient to cover the total mortgage payment. Lenders often require cash reserves equivalent to three months of principal, interest, taxes, and insurance (PITI) payments for these properties.

Gathering Your Application Materials

Borrowers must assemble various documents to demonstrate eligibility. To verify income, applicants provide pay stubs, W-2 forms from the past two years, and federal tax returns for the same period. Self-employed individuals submit a year-to-date Profit and Loss statement in addition to their tax returns. These financial records help the lender assess a consistent and sufficient income stream to support the mortgage obligation.

Proof of assets is crucial, requiring recent bank statements, usually for the last 60 days, and statements for any investment accounts or retirement funds. These documents confirm the availability of funds for the down payment, closing costs, and any required cash reserves. Lenders review credit reports to understand an applicant’s borrowing history and current debt obligations. Identification documents, such as a driver’s license or state ID, and a detailed employment history covering at least the past two years, including employer names and addresses, are also necessary components of the application package.

The FHA Multifamily Loan Application Journey

The process begins by identifying an FHA-approved lender, as the FHA does not directly issue loans. These lenders offer the FHA 203(b) loan program, which covers 2-4 unit properties for owner-occupants. Engaging with a lender early can provide valuable insights into specific requirements and potential pre-qualification or pre-approval. A pre-approval, based on a preliminary review of financial information, offers an estimate of the loan amount for which a borrower might qualify, providing a clearer budget for property searching.

Once a suitable property is identified and a purchase agreement is in place, the complete application package, including all gathered financial and personal documentation, is submitted to the chosen lender. The lender then arranges for an FHA-approved appraiser to evaluate the property. This appraisal determines the property’s market value and ensures it meets the FHA’s Minimum Property Requirements (MPRs). The appraisal fee typically ranges from $400 to $900 and can often be rolled into closing costs. A separate home inspection is recommended to uncover potential issues not covered by the appraisal.

After the appraisal, the loan application moves into the underwriting phase, where the lender’s underwriters meticulously review all submitted documents and the appraisal report. They verify the accuracy of information, assess the borrower’s risk profile, and ensure compliance with all FHA and lender-specific guidelines. This includes a thorough analysis of income, assets, credit history, and the property’s condition and value. If the underwriting is successful, the loan is approved, and the final stage is closing. During closing, legal documents are signed, funds disbursed, and the property title transferred to the buyer.