FHA loans are mortgages insured by the Federal Housing Administration (FHA) and issued by FHA-approved lenders. Multi-family or multi-unit homes are properties that can house more than one family.
They include apartment buildings, condominiums, duplexes, and mixed-use properties. It is a well-known fact that you can use an FHA loan to buy a single-family property.
The confusion is whether you can use an FHA loan to buy a multi-family property. The following is a complete guide to buying a multi-family property with FHA loans:
Loan rules set by the FHA allow individuals to apply for a loan that they can use to buy multi-family homes. However, the loan limit for such loans is four living units.
However, you will have to check with the mortgage lender to determine how many multi-family properties the lender is willing to let you buy with a single-family loan. Moreover, there are restrictions on property use when you buy a multi-unit home using an FHA loan.
The homes have to be occupied by the owners. The FHA prohibits using the properties for operations where renters stay for less than 30 days, for example, an Airbnb, bed and breakfast, or any similar rental processes.
If you take out an FHA loan to buy a multi-family property, you should find out if you can convince the mortgage lender to consider rental income from the properties as part of your debt-to-income ratio.
The FHA technically permits it, but there are various qualifying criteria you have to meet. It will largely depend on whether you have enough experience as a landlord or receive rental income from a property. You will need to quickly estimate your monthly payments using an FHA loan payment calculator and establish whether the rental income will be sufficient.
The minimum credit score you need to qualify for an FHA loan is 500, but most lenders have higher standards because of risky borrowers. Some lenders require a minimum credit score of 580, while others may go as high as 640.
When acquiring an FHA loan, the lender will also look at your debt-to-income ratio, which is the amount of debt you have compared to your gross income. Therefore, if you make $10,000 a month but have debt obligations, including your house payment, of $3500 a month, your debt to income ratio is 35%.
FHA’s official debt-to-income ratio requirements are 31% for the house payment and 43% for total debts. If buying multi-unit homes, the ratio requirement may be lower because you are expected to earn a steady income from the properties. However, if you have excellent negotiation skills, you can convince an FHA-approved lender to give you a loan with a higher debt-to-income ratio.
Like any other property you can purchase with an FHA loan, a multi-unit property must also meet FHA minimum standards and pass an FHA appraisal. An appraisal is a way to establish the property value and is in no way a guarantee. An appraisal is not a home inspection, so it does not mean the house is free of defects or habitable.
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