||Ask Dr. Don
I own a one-family home and am in the process of looking for a multi-family
home. I will sell the one family after I find a two- or three-family
home. My question is, how do I go about financing the multi-family,
since I will be buying it before I sell my one-family. I would like
to use the equity in the one-family to buy the multi-family. Would
it be a good idea to take out a home equity line of credit and use
that for a down payment on the multi-family? Or would a bridge loan
be better, and what kind of interest do you pay for a bridge loan?
Do you pay a higher interest rate for a multi-family home?
Even though you are looking for a property with two to four residential
units, in terms of mortgage lending the loan is considered a single-family
loan. As an owner-occupied property, your loan will have a lower
interest rate than a non-owner occupied property.
There is a FHA program for one to four unit dwellings,
but the loan limits are fairly restrictive. You can look up the
FHA loan limits in your county on this HUD
With conventional financing, the lender will assess
the risk of the loan based on your credit score, income, and the
property's projected rental income based on an operating income
statement. The status of the lease agreements for the rental units
will also influence the lending decision.
Loans originated under Fannie Mae guidelines require
two months of reserves for principal, interest, taxes and insurance
(PITI) while a Freddie Mac origination requires six months worth
of PITI reserves.
A bridge loan can provide the financing you need while
waiting for your current home to sell, but you should try to avoid
using a bridge loan. When you use a bridge loan to close on the
new home you'll be responsible for two mortgage payments plus interest
payments on the bridge loan. The bridge loan is collateralized by
the equity in your current home. You use the proceeds of the bridge
loan to cover the down payment and closing costs on the new home.
Bridge loans are meant to be short-term loans. They
typically have an initial term of six months with the ability to
extend if required. The ability to extend is important if the house
The interest rate on a bridge loan should be between
the rate you would pay on a first mortgage and a home equity loan.
Since it's a short-term loan, managing the fees and closing costs
can be more important than worrying about a rock bottom interest
rate. It's easier to get a bridge loan when your home is under contract,
but if your home is under contract you should be able to arrange
the two closings so you don't need a bridge loan.
Don't just assume that owning a one to four family
unit is right for you. Develop a business plan, examine cash flows,
and evaluate maintenance issues to be fairly certain that this investment
will work for you. Use your real estate professional and tax adviser
to help you make the best possible decisions concerning this investment.
-- Posted: Aug. 10, 2001