This FHA requirement might hurt your multi unit home buying chances

One of the perks of getting an FHA mortgage is the ability to purchase a primary home using just 3.5% down. The math however will change if you’re buying a multi-family property…

You heard that correctly. You can buy a multifamily property using an FHA-insured loan up to four units with just 3.5% down. The loan limits on multi-family properties are also significantly higher than one-unit property such as a single-family house.

So, from a payment to cash standpoint it is quite beneficial buy a hone with just 3.5% down and use the rents from the other units to help you qualify. However, there is a more ominous requirement in their guidelines that require the property to sustain itself. The FHA has a sustainability test for multi-family property which is to make sure that if you stop making the mortgage payment, the property could sustain itself meaning rents need to cover the total monthly mortgage payment.

If you’re purchasing a property using just a 3.5% down that’s going to drive your payment higher which is going to put further onus on the rents having to be higher to support the mortgage payment.

The total rents must be at 75% which makes it even more potentially challenging if you’re buying a with just 3.5% down. Put another way the gross rent is taken into consideration then 75% is taken into consideration assuming a 25% vacancy Factor so the gross rent x 75% is the calculation. That formula is what the lender will use. Lender will use the gross rents from appraisal report or current lease agreements whichever is lower. If you are targeting a property that is 4 units, it is possible that you might have to put more down in some cases as much as between 8 and 11% as a down payment to offset the lenders formula of having to use 75% of the rents in order to meet the FHA sustainability requirement.

So, if the price of the property is lower such as a 3 unit or a 2-unit property for example it’s much more realistic to think that you can purchase a property with 3.5% down on a property that doesn’t have as many units. If you are targeting a property that is 4 units, it is possible that you might have to put down in some cases as much as between 8 and 11 % as a down payment to offset the lenders formula at having to use 75% of the rents in order to meet the FHA sustainability requirement. Make sure you know this when you’re out searching  multi-family property using using FHA financing.

Conventional mortgage loan financing does not have this requirement, but often needs at least 20% down for a four-unit property.

Make sure that your pre-approval is engineered and structured appropriately if you’re using FHA financing for a multi-family home so you do not have an issue later on.

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