FHA mortgage for 2-4 unit multifamily property

FHA loans can be a great option to buy 2 to 4 unit multifamily property. There are a lot of multifamily properties mostly in urban markets like Washington DC, New York, Philadelphia, and Boston. However, there are a lot of guidelines to know. Make sure you can meet all the requirements.

First, learn about the maximum loan sizes

Check this URL for the maximum FHA loan amounts in your area: https://entp.hud.gov/idapp/html/hicostlook.cfm

In Washington DC for 2024 you can borrow up to the following loan limits:

• $1,149,825 for 1 unit homes
• $1,472,250 for 2 unit homes
• $1,779,525 for 3 unit homes
• $2,211,600 for 4 unit homes

But in nearby Anne Arundel County MD, you can only borrow up to:

• $667,000 for 1 unit homes
• $853,900 for 2 unit homes
• $1,032,150 for 3 unit homes
• $1,282,700 for 4 unit homes

Debt ratios

FHA likes to see a maximum debt ratio of 43% to 50%. There may be situations where FHA allows up to 57%. Each lender may have their own internal maximum debt ratio. For example, ours is 55%. For many years our maximum debt ratio was 50%. But we recently raised it to 55%. That may change in the future.

Cash reserves

Cash reserves are required for multifamily property. This means you need reserve cash above and beyond what is required for the down payment and closing costs.

If rental income is being used to qualify the homebuyer, this is when cash reserves are required. If the homebuyer can qualify without using the rent to qualify, then the cash reserves are not required.

The amount of cash reserves required is as follows:

• One-unit with an Accessory Dwelling Unit requires 2 months of the mortgage payment in reserve.
• Two-unit homes requires 2 months of the mortgage payment in reserve.
• Three-unit homes requires 3 months of the mortgage payment in reserve.
• Four-unit homes requires 3 months of the mortgage payment in reserve.

Cash reserves can come from liquid accounts like checking accounts, savings accounts, stocks, and CD’s. FHA will even allow retirement accounts to be used towards the cash reserves requirements.

How does rental income help me qualify?

Lenders can use 75% of the estimated gross rent to qualify.

The rental income is established by the FHA appraiser. They will prepare a comparable rental schedule in their appraisal. This will tell the lender what the estimated market rent is. The lender will give you credit for 75% of the estimated rent towards your income. The 75% of the gross rent is considered the net rent.

FHA self-sufficiency test

The FHA self-sufficiency test means is only for 3 to 4 unit properties, not 2 unit homes. It means they must be self-sufficient. This FHA requirement means that the 75% net rent needs to cover the mortgage.

Here is an example of a 4 unit homes that is self-sufficient:

• $8,000 gross rents
• FHA allows using 75% of gross rents to qualify
• $8,000 gross rent x 75% = $6,000 net rent
• Mortgage payment is hypothetically $5,900
• In this case the $6,000 net rent equals or exceeds the mortgage payment

Property management experience

Does FHA require any property management experience to use rental income when buying 2 to 4 unit homes? FHA does not require prior rental management experience, but it is up to the lender’s discretion when making this determination. Ask your lender if there is any reason that property management experience may be required.

Removing PMI

If you make a down payment of at least 10% on your FHA loan and the loan was originated on or after June 3, 2013, you can remove your FHA mortgage insurance premium (MIP) after 11 years.

If your down payment is less than 10% down, you may never remove your PMI on the FHA loan. However, if you feel you have sufficient equity to refinance to a Conventional loan, that may be a way to get rid of the PMI. Of course you’d need to ensure that the new  interest rate on the refinance merits a refinance.

There is more to know. But this gives you a good idea of some of the more important guidelines to get an FHA mortgage on a 2-4 unit multifamily property.

Still have questions?

There are many more guidelines.  But the above are some of the more important ones.

Do you still have FHA questions about buying a 2 to 4 unit multifamily home? Contact me to discuss your questions. Click here to schedule a call, or you can email me directly.

This entry was posted on Friday, November 22nd, 2024 at 10:57 am and is filed under FHA, Home Buying Process, Loan Types, mortgage. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.