mortgage

How to finance a duplex or multi-unit home

Mortgage form
Highlights
  • Financing options vary, depending on whether the owner occupies a unit.
  • How lenders treat rental income is complex.
  • Loan limits reflect the higher cost of multifamily dwellings.

Mortgages are available for buyers of duplexes, as well as of three- and four-unit dwellings. The options for financing multifamily homes depend on whether the buyer intends to occupy one of the units.

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Investor or owner-occupant

Owner-occupants can choose between Federal Housing Administration or Veterans Affairs or conventional financing, but investors are limited to conventional mortgage loans.

"For owner-occupants, the best financing is an FHA loan because even when you are purchasing a multi-unit building you only have to make a 3.5 percent down payment," says Peter J. Boyle, a senior loan originator for Summit Mortgage Corp. in Plymouth, Minn. "Investors must use conventional financing with a minimum down payment for a duplex of 20 percent. For a property with more units, they need a down payment of at least 25 (percent) to 30 percent."

Greg Altemus, a loan originator for Prime Lending in Newport Beach, Calif., says lenders are reluctant to approve loans for investors because they are considered to be a higher risk. Investors need a higher credit score and more cash reserves to qualify for a multifamily mortgage, and will pay more in upfront fees or a higher interest rate on the loan.

Can you use rental income to qualify for a loan?

Buyers of a duplex or multi-unit home can sometimes use the rental income from the additional units to qualify for a loan, but in general, the renters must have already signed a lease so that the rental payments can be verified.

"A percentage of the rental income is included as part of the underwriting for a loan," says Bill Mullen, president of NE Moves Mortgage in Waltham, Mass. "However, if the property is vacant you can't base a loan approval on anticipated rent payments. Some lenders may use a market analysis to estimate the rent, but in general they are very reluctant to lend a higher amount than the buyer qualifies for on their own unless there are renters in place."

Boyle says that for FHA loans, different jurisdictions have their own vacancy factor that reduces the amount of rent that can be added to the borrower's qualifying income. For example, in some places, borrowers can add $750 to their gross monthly income if they are receiving a rent of $1,000.

"FHA adds in higher cash reserve qualifications for three- or four-unit homes, so that the buyers need to have three months' (worth) of mortgage payments on hand," Boyle says.

Altemus says that Fannie Mae and Freddie Mac require borrowers to qualify for the mortgage on the entire building if there are no renters in place.

Qualifying for a multifamily mortgage

Buyers of multifamily homes need to meet the standard guidelines of FHA loans and conventional mortgages, with the best rates going to borrowers with credit scores of 740 or above. FHA loan requirements for single-family homes and multifamily homes are similar, although Boyle says that borrowers cannot have a nonoccupying co-signer for an FHA mortgage on a multifamily property.

Debt-to-income ratios for conventional financing cannot exceed 45 percent, with slightly looser guidelines for FHA loans.

FHA borrowers can use gift money for all of their down payment, while conventional borrowers must use some of their own savings.

Loan limits

Conforming loan limits for conventional loans are generally $417,000 nationwide, with higher limits for counties with higher housing costs. The limits increase incrementally for two-, three- and four-unit properties up to $801,950 for counties without a high housing cost add-on.

FHA loan limits have similar additions for extra units and for high-cost areas.

Buyer assistance

Altemus recommends that buyers interested in owning multifamily properties research county and city programs that can provide down payment help or low-cost loans.

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