How to qualify for an FHA multifamily loan (duplex, triplex, fourplex)
Daydreaming about earning some passive income but not sure where to start? An FHA multifamily loan offers you a way to get some landlord experience without going all-in on a property investment.
The Federal Housing Administration (FHA) backs loans for multifamily properties with up to four units. As long as you live in one of those units, you can rent out the others to create recurring income or start your nest egg.
Of course, renting out a property comes with a lot of responsibility and lifestyle changes. Find out whether an FHA multifamily loan may be right for you — and whether you’re ready to take on the role of landlord.
What is a multifamily property?
Multifamily properties take several different forms, but a good rule of thumb is that they’re built to accommodate more than one family or group of residents via separate living spaces.
For FHA purposes, multifamily housing can include:
- Apartment building with up to four units
- House divided into four legal units
Simply having a guest house or in-law suite on a property doesn’t make it a multifamily. While those extras are nice-to-have, they’re not built as distinct residences so they’d still be considered part of a single-family home.
Look for properties that are classified as multiunit properties in county records, have separate metering for power and water, and have separate bathrooms, kitchens, and other amenities.
How many units can I buy with an FHA multifamily loan?
An FHA multifamily mortgage loan allows homebuyers to purchase a house with two, three, or four units. Anything with 5+ units is considered commercial property, which are subject to completely different lending rules.
The FHA does not directly loan money to consumers. Instead, it insures mortgages offered by FHA-approved lenders. The government insurance means less risk for lenders and more leeway on credit scores and other requirements for borrowers.
That’s why it can be easier to qualify for an FHA loan than a conventional mortgage.
Although conventional loans often have a 3% down payment allowance, the credit score and debt-to-income (DTI) requirements can be tougher.
Do I have to live in the property?
FHA guidelines require that you live in at least one of the units. That must be your primary residence, meaning that it is your home full-time. But the rest of the units? Those are fair game for renting out.
Before you start looking for tenants, though, consider this. Being a landlord means always being on call for tenant emergencies. It also means dealing with maintenance issues and, in the worst case scenario, going to court with bad tenants.
That’s not to say renting out your other units isn’t worth it. Doing so can be a great source of extra income.
But think through a few key questions first:
- Do you have the time and financial resources to address emergency repairs or tenant complaints?
- How will you vet tenants’ credit and rental histories?
- What are the local laws around renting and property management?
- Will you deal directly with tenants or will you hire a property manager?
It’s a good idea to talk with a lawyer and have them draw up rental contracts so you know they’re air-tight. Find out whether there are local landlord associations you can join and use for recommendations on property managers and vendors who handle credit and background checks.
Check out online rental management apps that allow tenants to pay electronically. Many let you track expenses, collect rent, and more – free.
Get to know landlord and tenant laws in your city, county, state, as well as federal law. It’s relatively easy to accidentally do something illegal due to strict housing laws in some areas.
Finally, build up an emergency fund for any major repairs that suddenly come up.
FHA multifamily loan limits
The FHA sets loan limits — the maximum amount lenders can approve a mortgage for — each year. The agency calculates loan limits based on 115% of the median area housing price. Because the limits are linked to how in-demand a market is, they can change substantially within a state.
One county might be at the floor — the lowest limit set for that year — while another just a couple hours away is at the ceiling, or the highest limit.
As you’ll see in the table below, the limits for Alaska and Hawaii are higher than in the continental U.S.
FHA loan limits for 2021
You can look up the loan limits in your area through the HUD website.
Who is eligible for an FHA multifamily loan?
To be eligible for an FHA multifamily loan, borrowers must:
- Live in one of the units of the multifamily property as a primary residence for 12 months
- Have a Social Security Number
- Be eligible to work in the U.S.
- Meet the FHA’s borrowing requirements
Being eligible for an FHA multifamily loan isn’t the same as qualifying for one. Your lender’s underwriting team will verify your financial information to determine whether you can afford your monthly mortgage payments.
Using future rental income to qualify
FHA does permit lenders to use proposed future rent to help qualify for the property.
You must supply:
- An appraisal showing fair market rent
- Leases, if available, from current or future tenants
The lender may use 75% of estimated rent per the appraisal or actual rents, whichever is lower; it can also use the amount reported on the operating income statement if one was completed.
Keep in mind that not all lenders will allow you to use future rent. Check with your lender if you need this income to qualify.
One of the first things a lender will do when you apply for an FHA multifamily loan is pull your credit score and credit history. Your credit score is one of the factors that determines whether you qualify for the loan and how much you’ll have to put down.
Credit score requirements for FHA loans
|Credit score||Down payment|
|Lower than 500||Not eligible for FHA financing|
Lenders will also ask to see two years of employment history, along with documentation of your income.
You can use Social Security and Supplemental Security income to qualify, along with alimony and child support payments you receive.
Types of documentation your loan officer may ask for include:
- Pay stubs from employers
- Personal income tax returns if you’re self-employed
- Bank statements
- Profit and loss statements if you’re self-employed
But you must provide documentation that shows how much money comes in each month and that it will continue for the foreseeable future.
It’s a good idea to organize your documents before you apply. That will make the process faster and easier for you and your lender.
Pros and cons of an FHA multifamily loan
An FHA multifamily loan provides a way to purchase several units and earn income from some of them. Or, if you simply want extra units for relatives to live in so they’ll be nearby, FHA multifamily financing can get you and them into a new home.
But FHA loans have their drawbacks, too. Lower down payments mean a bigger loan, especially because of FHA mortgage insurance premiums (MIP). FHA borrowers pay an upfront mortgage insurance premium of 1.75%, though this can be rolled into the loan. If you put down less than 10% and take out a 30-year loan — which is the case for most FHA borrowers — you will pay MIP of 0.85% to 1.05% per year, paid monthly in 1/12 installments.
For example, a $300,000 FHA loan would require $212 per month in MIP at a rate of 0.85%.
You can stop paying the annual MIP by refinancing to a conventional loan once you have 20% equity in the home. But a refinance loan may have origination fees and other associated costs.
|580 minimum credit score||Upfront and ongoing MIP|
|3.5% down payment||Strict property requirements|
|Earn rental income||Increased responsibility as a landlord|
If you have great credit and a substantial down payment, you may want to pursue a conventional mortgage instead.
But FHA home loans are there to help low- and moderate-income people access affordable housing, and opting for multifamily financing can help you grow your wealth through homeownership and rental income.
FHA Multifamily loan FAQs
Yes, you can. FHA multifamily loans may be used for duplex, triplex, and fourplex properties.
You can use an FHA multifamily loan to buy an apartment building with up to four units, or a house that has been legally converted into four apartments.
The FHA also offers apartment loans for 5+ unit properties, but those are commercial loans, and approval criteria are different. Typically, only investor groups and large corporations use the FHA apartment building program.
Do the math. In addition to the costs of the loan — including down payment, closing costs, and mortgage insurance premiums (if you choose an FHA loan) — you’ll also have higher ongoing expenses for a fourplex than you would for a single-family home. These include maintenance needs, installing separate meters for electricity in each unit if there isn’t already separate metering, and legal fees associated with tenant management.
Understand your personality as well. Do you like people? Do you want to deal with problems like sharing walls with neighbors or noise after 11 p.m.? If yes, great, a fourplex may be a great situation for you.
But if the answer to those questions is no, you may be taking on way more than you bargained for with a fourplex.
FHA loans require a 3.5% down payment. But that money can come from a gift from a friend, family member, or even your employer. You may also qualify for down payment and closing cost assistance through a local program, which means you could buy a duplex, triplex, or fourplex with little or no money upfront.
FHA requires you to live in one of the units as your primary residence for at least one year. After that requirement is fulfilled, you can move out and rent out all the units.
The FHA does not loan money to borrowers. It insures loans made by FHA-approved lenders. How much an FHA lender will approve depends on a number of factors, including your credit score, income, and debt-to-income ratio.
Lenders must also abide by the FHA loan limits, which are set annually according to the median housing prices in an area.
The loan limits for 2021 range from $685,400 to $1,581,750 for four-unit properties in the continental U.S. The maximum allowed for a four-unit property in Alaska or Hawaii is $2,372,625.
The limits for all property types depend on how many units you’re buying and where the property is located.
FHA loan limits depend on where you’re buying and how many units. The FHA sets limits each year based on local housing prices. Limits vary from $356,362 on the low end for a single-family home to nearly $1.6 million for a four-unit property.
You can find the loan limits for every county in the U.S. at the HUD website.
The FHA issues strict property guidelines around livability, safety, and the overall condition of the home. Those criteria include having adequate living space and access to water and sanitation. The building materials used on the home must also be suitable to the area, meaning durable enough to withstand the elements and regular wear and tear.
When a seller accepts your offer on a home, your lender will schedule an appraisal with an FHA-approved specialist who will determine the value of the home and whether it meets FHA criteria.
If it doesn’t pass the appraisal, you can negotiate with the seller on who will schedule and pay for the repairs. They may be willing to reduce the sale price if you agree to manage and fund all of the necessary fixes.
If you’d like to become a landlord, or create a regular income stream through a rental property, buying a multifamily home with an FHA multifamily loan could help you get started. It’s a low down payment option that lowers the barrier to entry when it comes to generating rental income.
Remember, though, as a landlord you’ll be responsible for property maintenance such as plumbing or heating fixes, replacing household appliances, and other routine property care. You’ll also need to screen tenants and deal with any conflicts that arise.
I’m ready to apply
If you want to buy an investment property or break into commercial real estate, an FHA multifamily loan is not for you.
But if you’re just looking to earn a little extra income or you’d like to gain landlord experience, an FHA multifamily strategy is a good way to dip your toe into those waters.