How to finance a duplex or multifamily home

Susan Law Cain/Getty Shutterstock

At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here’s an explanation for

Purchasing a multifamily home can be a savvy way to generate passive income and build wealth. Multifamily mortgages are available for buyers of duplexes and three- and four-unit dwellings.

Multifamily homes with up to four units are considered residential for the purpose of financing, so you can buy them with mortgages like those used to buy single-family homes.

On the other hand, properties with five or more units are considered commercial real estate, so financing those is a different process. Loans for commercial real estate are generally more difficult to get, require bigger down payments and often require shorter repayment schedules.

Investor or owner-occupant property

The options for financing multifamily homes vary depending on whether the buyer intends to occupy one of the units.

Owner-occupants can choose between Federal Housing Administration (FHA) loans, Veterans Affairs loans, or conventional financing.  Investors, however, are limited to conventional mortgage loans only.

Here’s a look at three options for multifamily mortgage loans for duplexes, triplexes and fourplexes.

Conventional mortgages for duplex and multifamily homes

Conventional mortgages are suitable for:

  • Owner-occupants
  • Investors

You can apply for a mortgage for a multifamily home from a bank, credit union or mortgage lender, just as you would for a single-family home. Conventional mortgages conform to underwriting guidelines established by the government-sponsored mortgage giants Fannie Mae and Freddie Mac. When you apply, the lender considers your credit score, credit history, income, assets and other debts.

What’s the maximum mortgage amount for a multifamily?

Conforming loan limits for conventional loans are generally capped $510,400 nationwide in 2020, with higher limits for counties with higher housing costs. If you’re buying a multifamily property, there are higher loan limits.

The maximum loan limits increase in areas without a high-cost add-on to $635,550 for two-unit homes, $789,950 for three-unit homes and $981,700 for four-unit properties.

Can you use rental income to qualify for a loan?

Buyers of a duplex or multi-unit home can sometimes use the projected rental income from the additional units to qualify for a loan. For those payments to be taken into account, the renters usually must have already signed a lease.

Lenders can consider rental income from the multifamily property as long as the prospective borrower can provide appropriate documentation of the payments.

According to Fannie Mae guidelines, the property must be either a two-, three- or four-unit residence that is owner-occupied, or a one- to four-unit investment property. That means if you’re going to live in one of the units, rent from the tenant-occupied units can help you qualify for a mortgage. If you’re an investor, you can count the rent from all units.

Not all the income applies though; typically 25 percent is subtracted to account for vacancies and maintenance.

You’ll also need to provide documentation to show that the rental income is stable. Acceptable proof could be a current lease, an agreement to lease, or at least two years’ worth of consistent rent history. You may also need to provide IRS Form 1040 Schedule E to prove that the rent was reported on your tax return.

Investors typically need higher down payments than owner-occupants

Traditional mortgages require a down payment of 20 percent. Buyers can sometimes get mortgages with lower down payments, though they’ll have to pay for private mortgage insurance, or PMI.

If you’re buying property as an investment and don’t plan to live there, you’ll have to meet different criteria to get a mortgage. Investment properties don’t qualify for PMI, so you’ll have to put down at least 20 percent, and possibly more, to get traditional financing. Lenders generally assume more risk with investment properties, so they might require 25 or 30 percent down, depending on the interest rates on offer.

FHA loans for financing duplexes or multifamily homes

If you plan to live in one unit of the multifamily property, you may be eligible to finance it through a Federal Housing Administration (FHA) loan. These loans are backed by the government and can be used for properties with up to four units.

FHA loans can be suitable for:

  • First-time homebuyers
  • People with less-than-perfect credit
  • Buyers who don’t have enough saved up for a large down payment

FHA loans offer these advantages:

  • Lower down payments than conventional loans — as low as 3.5 percent
  • Low closing costs
  • Easier qualification

FHA loans are not issued by the Federal Housing Administration. They are issued by FHA-approved banks and mortgage lenders, and the FHA guarantees a portion of loans, protecting the lender in case of default. Thanks to that guarantee, lenders are willing to offer more favorable terms, extend mortgages to borrowers with lower credit scores, and accept smaller down payments.

FHA loans are probably not right for you if you have excellent credit and enough money saved for at least a 10 to 15 percent down payment, because they can be more costly than conventional mortgages.

But if your credit score is low or your funds are tight, an FHA loan may be the best option for you.

FHA loan minimum credit scores

To get an FHA loan with 10 percent down, you’ll need a credit score between 500 and 579.

For an FHA loan with 3.5 percent down, you’ll need a score of 580 or higher.

FHA loan documentation

When you apply, lenders will ask you to provide pay stubs, W-2s, tax returns and other financial documentation. If you’re counting on rental income to help you qualify, you’ll also need to provide leases, rent guarantees or rental history as well.

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.

VA loans for financing duplexes and multifamily homes

Qualifying for U.S. government-backed VA loans is one of the benefits associated with military service, and they can be used to finance properties with up to four units, not just single-family homes. If you or your spouse are a service member or veteran, you may qualify for a VA loan. VA loans are not intended for investment properties, so you can only finance a multi-unit property with one if the qualifying applicant plans to live in one of the units.

VA loans are suitable for:

  • Military service members, veterans and their spouses

VA lenders are likely to give you more favorable terms than you’d otherwise get with a conventional mortgage, due to the VA guarantee on a portion of the loan.

There are plenty of advantages to taking out a VA mortgage if you qualify, including:

No down payment requirement

VA loans can be used to finance up to 100 percent of the purchase price. That means no down payment is necessary.

No private mortgage insurance (PMI)

VA loans also save you money because they don’t require private mortgage insurance. When you get a conventional mortgage while putting less than 20 percent down, you’ll typically be required to pay for PMI. But VA loans don’t have this requirement, saving you a substantial sum.

No minimum credit score requirement for VA loans

The VA does not have a minimum credit score requirement. Lenders are required to look at the applicant’s whole financial picture and the bank or mortgage lender may have its own individual requirements for VA borrowers.

One-time funding fee can be financed too

VA loans have a funding fee. Generally, these fees range from 1.25 percent to 3.3 percent of the total loan. However, you don’t have to pay it at closing since the VA allows it to be included in the loan. Some veterans may qualify for a waiver if they receive VA disability compensation or meet other criteria.

VA loan Certificate of Eligibility (COE)

You need a valid Certificate of Eligibility  to get a VA loan. You can get it online or ask the lender to get it for you, either online or using an electronic application.

Buying a duplex or larger multi-unit home to live in and rent out can be a great strategy for building wealth. If you’re a first-time homebuyer or a veteran, you might be able to use the special benefits of a government-backed loan to purchase the property, with a minimal down payment and reasonable interest rate. Likewise, purchasing a multifamily property as an investment can set you on a path to long-term financial security.

Written by
Zach Wichter
Mortgage reporter
Zach Wichter is a mortgage reporter at Bankrate. He previously worked on the Business desk at The New York Times where he won a Loeb Award for breaking news, and covered aviation for The Points Guy.
Urgent! Rates expected to jump on Fed Day
-- Days  :  
-- Hours  :
  -- Minutes  :
  -- Seconds
Close icon
Compare refinance rates