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.
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.
In the ideal scenario, you’ll be renting out at least one unit in your FHA property and using that income to pay for the FHA loan itself. The key here is that FHA loans are only allowed in cases where the borrower uses the property as their primary residence, so it’s essential that you live in at least one unit of the property in question.
FHA multifamily options for 4+ units
Yes, there are indeed FHA multifamily loans for borrowers looking at property over four units. Most of the time, these are for-profit businesses looking to acquire multifamily, but nonprofit businesses can also qualify. Here is a breakdown according to the FHA:
FHA multifamily financing options
The FHA will insure mortgage loans for the following types of for-profit and nonprofit multifamily properties.
| Type of Housing | Description |
|---|---|
| Healthcare facilities | There are specific sections in regard to FHA loans for healthcare. Section 232 (Mortgage Insurance for Residential Care Facilities) and Section 242 (Mortgage Insurance for Hospitals program) allow multifamily loans for health care. |
| Existing multifamily rental housing | HUD Sections 207 and 223(f) allow an existing multifamily property in “pristine condition” to be purchased using an FHA-backed loan. The “pristine” part is crucial; if any renovations need to be done at all, then the borrower will not qualify. |
| Rental and co-op housing | HUD Section 221(d)(4) allows multifamily units that are rented or used as co-op housing to get a loan, as long as the target is median-income housing. This means that the rental price forecasted and charged must align with the median income metrics in the area. |
| Senior housing | HUD Section 202 stipulates that multifamily properties can be financed without any renovations as long as it’s being used for seniors, who also qualify as low-income. |
| Special needs housing | HUD section 811 also allows a similar no-renovation requirement as long as the housing is being used for special needs. |
Senior housing and special needs purchases must be nonprofit organizations in order to qualify.
Other considerations for multifamily housing over 4 units
Mixed-use properties
A mixed-use property is one that will be part multifamily and part commercial. Think of apartments above a convenience store or Dairy Queen. In this case, 51% of the mixed residential property must be residential to qualify for multifamily loans, and not one of the commercial FHA loans.
Rental income added to Debt-to-Income Ratio (DTI)
Just as we mentioned the possibility of the FHA looking into rental income and landlord experience when borrowing for a standard 1-4 unit multifamily property, they will use rental income in the DTI when referencing their loan application metrics.
Pro Tip
What if I can’t get an FHA multifamily loan?
Honestly, FHA multifamily loans can be difficult to find, at least that’s according to Doug Vansoet, the co-founder of SoCal Home Buyers: These loans come with competitive interest rates with no high payment at the end, but you have to keep in mind that these loans are only limited on the number of units and type of properties. These loans can be harder to find than other traditional loans or FHA single-family loans.
If you can’t get an FHA multifamily loan, don’t worry, you can still get a loan. You might want to consider the following:
Jumbo loan
Jumbo loans are loans that exceed the standard loan limits in certain areas. You will need better credit than a standard loan as well as a higher down payment and possibly higher interest payments.
Commercial loan
A commercial loan is used for businesses in most cases. With real estate, it’s typically associated with storefronts and shops. However, multifamily properties can also qualify for commercial loans, depending on the lender. With mixed-use properties, in which part is residential and part commercial, a commercial loan might make sense if the residential component is less than 51%.
Conventional non-FHA loan
A conventional loan is a standard loan that is not backed by the FHA. In fact, many multifamily investors will buy multifamily with an FHA-backed loan and then refinance into a conventional loan. According to Humberto Marquez, a real estate agent with Awning, this is common practice: After living in the property for a year, consider refinancing into a conventional loan. This way, you might eliminate the FHA mortgage insurance premium, saving a considerable amount monthly. Funny story: A friend, diving into real estate, once stumbled upon a triplex, a little worn down but in a fantastic location. He lived in one unit, rented out the other two, and used an FHA loan for the purchase. Within two years, he refinanced, pulled out equity, and repeated the process. He’s now onto his third property!
FAQ
Can I buy a 4-plex with a FHA loan?
Yes, you can buy a fourplex with an FHA loan, as it’s within the 4 unit limit for standard FHA financing. Be careful to note, however, that you must live in one of the units that you claim as your primary residence, if not, it will categorized under “investment properties.”
What is the 75 rule for FHA loans?
The 75 rule stipulates that the maximum monthly mortgage payment is limited to 75% of the total rental income. The payment must not only be enough to cover principal + interest in the mortgage but must also include all outgoing payments such as HOA, mortgage insurance, and property tax.
What is the FHA six-month rule?
The FHA 6-month rule states that you must be fully employed for at least 6 months before the FHA certifies the validity of the loan. Gaps in employment overall will be tolerated, but you must be able to prove the prior 6 months before the FHA certifies the loans.
Key takeaways
- It’s possible to use an FHA multifamily loan for a multifamily property if certain conditions are met, either a standard FHA loan for under 4 units or a specific multifamily loan for 4+ units
- For units that are four or fewer, there are loan limits based on the number of units and areas they are located in. Counties that are “higher cost” will have higher limits.
- FHA multifamily loans that are greater than 4 units can still be acquired, but there are various rules and requirements to be able to get one.
- There are other options to finance multifamily, such as conventional loans, jumbo loans, and commercial loans. In fact, buying with an FHA-backed loan and refinancing what a conventional loan is par for the course.
