HUD Two To Four Unit-Multi Family Guidelines On FHA Loans

The team at Capital Lending Network, Inc. (CLN Mortgage)  has helped many first-time homebuyers enter the housing market. As millennials currently make up the majority of first-time homebuyers, many of them are taking a different approach when it comes to buying a home. Census data show millennials tend to live closer to major cities where multi-unit properties are more common.

Buying Multi-Family Home As First Home

Buying a multi-family home as your first house could be a great long-term investment opportunity. In this blog, we will detail how to purchase a three or four-unit home revising an FHA mortgage loan. The team at CLN Mortgage are experts in FHA mortgage financing. CLN Mortgage does not have any lender overlays. This article will give you insight into what to expect when buying your first multi-unit property.

Lender Overlays Versus HUD Two To Four Unit Multi-Family Guidelines

Lender overlays can get in the way when purchasing a home with FHA financing.

Lender overlays can get in the way when purchasing a home with FHA financing. Many banks have credit score overlays where they require a 620 or even a 640 credit score to move forward. When purchasing a multi-family home, many banks also have extra reserve requirement overlays. We will detail reserves later in this blog, but we do not have any lender overlays when it comes to FHA mortgage financing. This is why we are able to help more families than most lending institutions. If you feel like you have been given incorrect mortgage advice, please reach out to our expert team today. We have stayed on top of all FHA guideline changes and will take the time to explain the entire mortgage process to you and your family!

HUD Two To Four Unit Multi-Family Guidelines On Low Down Payment
HUD Two To Four Unit Multi-Family Guidelines On Low Down Payment

If you are trying to purchase a multi-family home, you probably know the down payment requirements are very high when utilizing conventional mortgage lending. The Federal Housing Administration offers a low down payment option to buy a 2 to 4 unit property. This can be a great investment opportunity to capitalize on rents received from the other units of your property. If you are going to utilize FHA mortgage financing to purchase a multi-family home, you are required to live in one of the units. FHA financing is only available for your primary residence. Fannie Mae’s doesn’t allow financing vacation homes and on second home financing, there are specific rules and regulations you have to follow. You can then collect rents on the other units from the property. The rules are slightly different when purchasing a home with three or four units compared to a one to a two-unit property.

HUD Two To Four Unit-Multi Family Guidelines On Self Stability Test

The main item you must address is called the self-stability test. We will now go into detail on what this means. In order to purchase a three or four-unit property with an FHA loan, the Federal Housing Administration wants to know that the property is self-sufficient. In Layman's terms, the total rent you receive from the other units must be equal or greater than your total monthly mortgage payment (including property taxes, homeowners insurance, and any homeowners association dues). Since the rents received will be more than enough to cover your total mortgage payment per FHA guidelines, this is a great opportunity to live with very low housing expenses. As a first-time homebuyer, this can put you on the track to own many more properties in your lifetime.

HUD Two To Four Unit-Multi Family Guidelines On Occupancy And Rental Requirements

The self-sufficiency test can be tricky when purchasing a three-unit property compared to four-unit property. With a four-unit property, there are three other units to rent out in which you can cover your total mortgage payment. With a three-unit property, the other two units must cover your entire mortgage payment. Please make sure your real estate agent understands the self-stability test or have your agent give us a phone call. We will take the time to make sure you and your agent understand this key component to buy a multi-family home with an FHA loan.

HUD Two To Four Unit Multi-Family Guidelines On Rental Income
HUD Two To Four Unit Multi-Family Guidelines On Rental Income

How do you determine the rental income from the other units? This is a great question because you don’t own the property yet meaning you do not have an executed lease for the other units. So, you must rely on the fair market value figures to determine the net rental income. This information will be determined by the appraiser.

Market Rent On Appraisal Used As Par Rent Less Discount

The same appraiser who gives us the value for the property will complete a fair market rent schedule for each unit. You then need to factor in the vacancy rate for your area. Vacancy rates can vary depending on the area of the country you live in. But in an area where the vacancy rate is 20%, you will then deduct 20% from the fair market rent determined by the appraiser to determine fair market rent. This is considered your net rental income. This figure with all units considered must cover your total mortgage payment in order to utilize FHA mortgage financing (self-sufficiency test).

Can You Use Rental Income As Qualifying Income To Purchase Multi-Family Home?

Can you use rental income as qualifying income to purchase the property? The answer to this question is yes, you may utilize rents expected in order to qualify for an FHA mortgage loan.

Can you use rental income as qualifying income to purchase the property? The answer to this question is yes, you may utilize rents expected in order to qualify for an FHA mortgage loan. The way rental income is determined is slightly different from the net income that must be used for the self-sufficiency test.

HUD Two To Four Unit Multi-Family Guidelines: How Rental Income Can Be Utilized 

When utilizing rental income from the other units as qualifying income for the property, you may utilize 75% of the fair market rent determined by the appraiser. You may utilize 75% of rents from each unit. This can help many first-time homebuyers have enough income to qualify for a property even if they are in an entry-level employment position.

HUD Two To Four Unit Multi-Family Guidelines On Down Payment Requirements

What are the down payment requirements to purchase a three or four-unit property with an FHA loan? The biggest advantage to utilizing an FHA mortgage loan to purchase a multi-family home is the minimum down payment required. You are only required to put down 3.5% of the purchase price. 3.5% down is much more appealing than the 25% down payment requirement for purchasing a three to four-unit home with a conventional mortgage.

HUD Two To Four Unit Multi-Family Guidelines: FHA Minimum Credit Score Requirements

What is the minimum qualifying credit score to purchase a three or four-unit property with an FHA mortgage loan? Technically the minimum qualify and credit score to purchase a multi-family home with an FHA loan is 500. However, if you plan on putting down 3.5%, you must have a minimum credit score of 580 or greater. If you were utilizing a conventional mortgage of 25% down, you would be required to have a minimum credit score of 660! Down payment and credit score requirements make FHA financing very attractive for multi-family homes.

Closing Costs On Two to Four Unit Multi-Family Home Purchase Transactions

Are closing costs higher on a multi-family home? The short answer is yes, there are a few more items that must be included in closing costs when purchasing a multi-family home. The appraisal for a multi-family home is slightly more expensive than a single-unit property due to the complexity of the report.

How Fair Market Rental Value Is Determined

You will also need to pay for the fair market rent schedule so your lender can justify the self-stability test. Depending on the county you are located in, the title insurance may be slightly more money as well. But besides these few minor charges, closing costs are very similar to purchasing a single-family home.

HUD Two To Four Unit Multi-Family Guidelines On Reserve Requirements

As mentioned earlier in this article, FHA does require reserves when purchasing a multi-family home. What does the term reserves mean? Reserves are liquid assets that are still in your bank account after paying your down payment and closing costs. The lender will not take these funds from you but must verify you have access to these funds. This can be money in a savings or checking account, stocks that can be liquidated, any sort of money market account, or a retirement account. You cannot utilize gift funds or borrowed funds as reserves. Meaning these must be your own funds.

The Amount of Reserve Requirements Depends On Number of Units

When purchasing a multi-family home with an FHA mortgage loan, the lender will require three months of reserves. So if your total mortgage payment is $2000, the lender must verify you have a minimum of $6000 leftover in your bank accounts or other financial institutions before closing on your multi-family home.

Are Reserves Verified?

This is a way to protect the lender in case you lose your job, have a tenant move out, or suffer a different financial emergency.

What is the purpose of verifying reserves? This is a way to protect the lender in case you lose your job, have a tenant move out, or suffer a different financial emergency. The lender would like to verify you can make your mortgage payment for a few months to get back on your feet. Four more questions surrounding reserve requirements, please reach out to Mike Gracz on 630-659-7644 or via email at mike@gustancho.com.

Becoming A Landlord With An FHA Loan

Since many borrowers utilizing an FHA mortgage to purchase a multifamily house are first-time homebuyers, we would like to give a few tips and tricks for being a landlord. It is important to understand that each unit of the home will have its own address as well as a separate entrance. Each home will also have its own kitchen and bathroom. So even though the homes are connected, each unit acts as its own individual home.

FHA Multi-Family Purchase For Owner-Occupant Homebuyers Only

Since you are required to live in one of the units, repairs can be easier to complete. Since your home will be connected to the other units, if something goes wrong in a different unit, you will be close by. As a landlord, you will have access to the other units of the property. This will allow you to let in anybody required to complete the repair. Even though you are close by, repair costs can add up quickly. You will want to make sure you have an emergency fund set aside for any repairs that may come up. Also, a reason why the lender requires to verify reserves.

Negative of Buying Two-to-Four Unit Multi-Family Property 

It is important to understand there are also downsides to renting out the other units of your home. One of the main downsides can be establishing a personal relationship with your tenants. If you are a landlord who does not live on the property, this will be treated more like a business. But since you literally share a wall with these neighbors, it is easy to establish a personal connection. Since the relationship is personal, you may be more inclined to offer your tenants leeway with paying rent. It is a tough situation to physically knock on someone’s door and ask them to pay their rent. But you must treat this investment opportunity as a business. It is important to know your tenants.

Screening Potential Renters

A screening process is very important. Four-unit properties are also more expensive than most single-family homes. Even though this is an investment opportunity, the upfront cost can be a hurdle. It is important to understand a budget when utilizing rental income. Since you will have multiple units to rent out, you need to factor in the costs associated with this investment. These costs can include everything from marketing, advertising, legal fees, utilities, insurance, property taxes, and of course your FHA mortgage.

How To Learn To Become A First-Time Landlord

Speaking with a professional will help first-time landlords know what to expect. Since this is a great investment opportunity, speaking with someone with experience will help quite a bit. Even though you are required to live in the home with an FHA mortgage loan, you are not required to live there forever. As your life progresses, you may decide to move out of the property eventually. That being said you can now rent out all of the units in the property and purchase another home for yourself.

Building Equity By Buying Two to Four Unit Multi-Family Building With an FHA Loan

If you are a young first-time home buyer, a multi-family home could be a great tool to start building wealth and investing in another real estate down the road. As long as you are comfortable being a landlord and living next to other tenants, this is a great investment tool. You can ask your realtor to only show you multi-family homes in your area.

Home Being Self-Sufficient Test

Since qualifications require the home to be self-sufficient, this will be a great opportunity to start saving for future investment opportunities down the road. The guidelines for FHA mortgage financing can be difficult to understand, please call the experts to go over any questions you may have. The team at Capital Lending Network, Inc. is available seven days a week and is here to answer all mortgage-related questions. Give us a call on 800-900-8569 or email contact@capitalendingnetwork.com .


Peter has 7+ years of experience in residential lending. He is a licensed Realtor in the Chicagoland area.