How to finance a duplex or multifamily home

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Financing a duplex or multifamily home can be a smart way to build wealth. Bankrate’s guide covers the differences in classification between duplexes, multifamily units and commercial properties, as well as the different types of financing associated with each.

What’s the difference between a duplex, multifamily and commercial property?

  • Duplex: Duplexes are multifamily homes with two units sharing the same building. You can receive a mortgage for a duplex through FHA. However, if you want a government loan like an FHA loan or through Fannie Mae, you will need to occupy one of those units.
  • Multifamily unit: Homes with up to four units are considered residential for the purpose of financing. The multifamily mortgage loan requirements provide you with the same kind of options you would have with a single-family home.
  • Commercial property: Properties with five or more units are considered commercial real estate, so financing them 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 among FHA loans, Veterans Affairs loans or conventional financing. Investors, however, are limited to conventional mortgage loans only.

4 loan options for duplex and multifamily property

Here’s a look at four loan options for duplexes and multifamily properties.

1. Conventional loans

Conventional mortgages are suitable for owner-occupants and 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.

2. FHA loans

These loans are backed by the government and can be used for properties with up to four units, if you plan to live in one of them. They work best for first-time homebuyers, those with lower credit scores or smaller down payments. They offer benefits like:

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

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.

  • 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 multifamily 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.

3. VA Loans

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. VA loans are not intended for investment properties, so you can only finance a multi-unit property if the qualifying applicant plans to live in one of the units. VA loans are suitable for those serving in the military, 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, financing up to 100 percent of the home’s price and no private mortgage insurance (PMI).

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

  • No minimum credit score requirement for VA loans: Lenders 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 obtain a VA loan. You can get it online or ask the lender to get it for you, either online or using an electronic application.

4. Commercial loans

Commercial loans are for businesses looking to build investment income or scale operations. As such, your lender wants to know your debt service coverage ratio, which is calculated by dividing your net operating income by the principal and interest of the loan requested. That figure enables the bank to determine your ability to repay the amount requested. You can receive commercial lending from banks or credit unions or with an SBA 7(a) loan.

  • Shorter repayment terms: With conventional mortgages, you could have up to 30 years to repay. However, with commercial loans, your repayment term varies from five to 20 years with a 30-year amortization schedule. To illustrate, you might make payments for the first 10 years on your mortgage, but the amount due each month would reflect a 30-year amortization. At the end of that term, you would make one final payment for the total balance due.
  • Larger down payments: With a commercial loan, your lender might require a deposit of 20 to 30 percent of the purchase price, making it much higher than conventional options where you could pay as low as 3.5 percent down.

What’s the maximum mortgage amount for a multifamily?

Conforming loan limits for conventional loans are generally capped at $548,250 nationwide in 2021, with higher limits for counties with higher housing costs. If you’re buying a multifamily property, there are higher loan limits.

For most areas “other than Alaska, Hawaii, Guam, and the U.S. Virgin Islands,” according to the FHFA, the maximum loan limits are $702,000 for two-unit homes, $848,500 for three-unit homes and $1,054,500 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 20 percent down payment. Buyers can sometimes get mortgages with lower down payments, though they’ll have to pay for 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.

Hurdles when financing a duplex or multifamily home

When learning how to buy a duplex or other multifamily unit, there are unique characteristics you will not encounter with a conventional mortgage. Appraisals might be rare to come by since there might not be as many comparable units in the area. So, if you use a multifamily conventional loan, you could end up having to shell out a higher down payment, upward of 15 percent for duplexes and 20 percent for multifamily homes (those with three or four units).

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.
Edited by
Senior editorial director
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