Can I Use An FHA Multifamily Loan to Invest in a Multifamily Property?
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Summary:
It’s possible to use an FHA multifamily loan for a multifamily property if certain conditions are met. The easiest option is to buy a multifamily property with four units or less and apply for a more conventional FHA-backed mortgage loan that you would use for a single-family home. If the property is over four units, it needs to fit specific criteria, such as housing for low-income elderly residents, healthcare-related facilities, or an existing multifamily residence in pristine condition.
If you are unfamiliar with the term multifamily, it can be described as one landlord for multiple units. In the United States, buying and renting are popular ways to build and preserve wealth. They buy multifamily buildings, rent them out, and when the value grows, they refinance them and take on debt rather than pay capital gains tax on the sale of a property. Federal Housing Administration (FHA) backed loans are some of the best loans available when it comes to rates and flexible terms. But can you get a multifamily FHA-backed loan? Yes, but with certain conditions met, let’s break it down below.
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Can I use an FHA multifamily loan?
You can use an FHA multifamily loan in the following cases. If your multifamily purchase is 4 units or less, you can use a traditional FHA-backed loan, similar to what you use for a single-family home or a condo. When dealing with Multifamily properties with over four units, certain conditions must be met.
Buying a 1-4 unit multifamily property with an FHA loan
As mentioned above, if the loan is for four units or less, the FHA will give similar standards to single-family FHA loans. These standards are outlined in the table below.
| Criteria | Requirement |
|---|---|
| Credit Score | 500 FICO + |
| Down Payment | 3.5% for FICO scores 580+ |
| Debt to Income Ratio | 43%-60% |
| Property Type | 1-4 Units |
| Property Use | Primary Residence Only |
The FHA will also have “loan limits” on their standard loans for multifamily housing. Some of the more expensive counties in the US (think SF or NYC) will have even stricter loan limits than run-of-the-mill counties like Jefferson County in Colorado. Below are the loan limits for an FHA standard loan as of this writing.
Standard FHA loan limits
1 Unit/Single Family: $472,030
2 Units: $604,400
3 Units: $730,525
4 Units: $907,900
High-cost area FHA loan limits
1 Unit/Single Family: $1,089,300
2 Units: $1,394,775
3 Units: $1,685,850
4 Units: $2,095,000
FHA Loan limits differ from county to county, so make sure that you investigate before you start looking around for financing.
Understanding cash-cow
Suppose you are not buying a 2-unit property but rather a 4-unit property. In that case, the FHA will probably estimate the financials of your property to ensure that rent will cover the cost, even if there is a shock in interest rates or the rental market. Make sure you model out each multifamily investment to give you some leeway.
Other considerations for standard multifamily loans
FHA Loan limits can change and vary, but most of the time, the loan is 115% of the median home price in the area· Many times, for a unit that is over 2 units, the FHA will look to see if the landlord has experience in renting out properties, with evidence to prove it. For Multifamily loans, the borrower needs to prove reserves if they have more than 2 units. 3-4 unit multifamily properties will typically require 3 months of reserves.
The borrower MUST live in at least one of the units as their primary residence to qualify for the FHA standard loan. The primary residence aspect is key, says Martin Orefice, the owner of Rent to Own Labs.
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