What Is An FHA Multifamily Loan, And What Is It For?

FHA loans can allow you to purchase a property with lower credit and down payment requirements, saving you money upfront. Naturally, if you’re looking to get into real estate investing or purchase a large, multi-unit property, you may want to take advantage of these less-rigid requirements. However, FHA restrictions and differing definitions of a “multifamily home” could make finding financing options more complicated for an investor.

One of these options, an FHA multifamily loan, may be useful under certain circumstances. Let’s break down how this loan type works, the definition of a multifamily home, and other financing options.

Can You Buy A Multifamily Home With An FHA Loan?

You can and you can’t, depending on one’s definition of a multifamily home.

An FHA loan can be used to purchase a primary residence, meaning a property the owner intends to live in for most of the year. Typically, the Federal Housing Administration (FHA) will only back funding for properties that fit the definition of a single-family home (a home with up to four units). Many consumers, though, view multi-unit properties as multifamily homes because of the potential to rent to multiple tenants.

In the real estate world, a multifamily home is a residential property with five or more units, such as an apartment building, condo or townhouse. Under special circumstances outlined by the U.S. Department of Housing and Urban Development (HUD), you can obtain an FHA multifamily loan to purchase a property fitting the definition of five or more units.

Rocket Mortgage^Ⓡ doesn’t currently offer FHA multifamily loans for commercial properties, but to keep you informed, we’ll now break down the types of multifamily financing available from the FHA, and the lending processes involved.

FHA Multifamily Financing Options

The FHA will insure mortgage loans for the following types of for-profit and nonprofit multifamily properties:

• Healthcare facilities: Under Section 232 (Mortgage Insurance for Residential Care Facilities) and Section 242 (Mortgage Insurance for Hospitals program) of HUD’s National Housing Act, the FHA will insure financing and refinancing for healthcare facility projects. These FHA healthcare loan programs allow greater public access to affordable healthcare and benefit HUD’s community development mission.
• Existing multifamily rental housing: Sections 207 and 223(f) can be used to finance the purchase or refinancing of multifamily rental housing. A property in need of substantial renovation won’t qualify for this financing, and HUD won’t approve a mortgage until any critical repairs are completed.
• Rental and co-op housing: The FHA will insure mortgages for the new construction or rehabilitation of rental and co-op housing under Section 221(d)(4). Eligible housing should be made available to moderate-income families, as well as the elderly and the handicapped.
• Elderly housing: HUD’s Section 202 will help finance the purchase or refinance of properties used to provide housing for low-income elderly people. Properties can be financed regardless of whether they require renovations. Only nonprofits will be eligible to apply.
• Special needs housing: HUD’s Section 811 (Supportive Housing for Persons with Disabilities program) helps provide financing to purchase rental housing for low-income disabled adults. The program also provides rental assistance to state housing agencies to keep costs low for potential tenants. As with the elderly housing program, only non-profits may apply.

How To Get An FHA Loan For A Multifamily Property With Four Units Or Less

If you’re looking to buy a multifamily home in the form of a property with no more than four units, you’ll only need to apply for an FHA residential loan. Typical lending requirements for an FHA loan include a credit score of at least 580 and a debt-to-income (DTI) ratio below 45% for the best chance of qualification. Lenders also typically require an appraisal of the property being purchased.

A benefit to buying investment property with an FHA loan is the smaller down payment – as low as 3.5%, regardless of the number of units. The downside is you’ll pay mortgage insurance premiums (MIP) for the life of the loan.

The catch to using an FHA loan to finance a multifamily investment property is that you, the borrower, must occupy at least one of the units. This makes the property your primary residence and can qualify it for FHA financing.

Living in the property you’re renting out, also known as house hacking, can be a financially savvy way to get started with real estate investing, but it’s not for everyone. You’ll want to consider your goals and needs.   

FHA Loan Limits

The county a property resides in determines FHA loan limits. In lower-cost counties, the maximum FHA floor for the loan limit for a one-unit property is $420,680. In higher-cost locations, the upper end of the limits is $970,800.

It’s important to note that loan limits will be higher if more units are in the property.

Alternative Multifamily Mortgage Options

FHA loans aren’t the only option for a real estate investor. Take a look at other loan options below.

Conventional Loan

You can use a conventional loan to buy a single-family (two to four) or multifamily (five or more units) property and use either as investment properties. Under a conventional mortgage, the properties don’t have to be your primary residence (meaning you don’t have to live in one of the units).

However, the down payment for a conventional loan can be 15% – 30% of the home’s purchase price, and the number of units and purpose for buying the property can affect that amount. The good news is that with a higher down payment, you won’t have to purchase private mortgage insurance (PMI) and you could see potentially lower interest rates than with an FHA loan.

Jumbo Loan

Jumbo loans can provide financing higher than your area’s loan limits, but with this often comes higher credit score and down payment requirements, and a higher interest rate. If a jumbo loan sounds like it could be a good fit for your needs, it’s worth researching whether it will truly cost you more.

Commercial Loan

A commercial mortgage is typically used for purchasing business-related properties, such as a storefront, shopping center or company headquarters. Lenders usually charge higher interest rates on commercial loans because of the greater risk involved, as repayment will generally depend on the profits and success of the business. Another factor lenders may consider is the amount of foot traffic in the area as an estimate of a company’s potential business prospects.

FAQs About FHA Multifamily Loans

Can I buy a duplex with an FHA loan?

A duplex is a property with two units usually separated by a shared wall. Since the number of units is within what qualifies as a single-family home, a duplex should be eligible for an FHA loan.

How many units can I get with an FHA loan?

An FHA residential loan can be used for a primary residence with up to four units. For multifamily homes with five or more units, see the FHA Multifamily Financing Options section above.

Can I have two FHA loans?

Borrowers can typically only have one outstanding FHA loan at a time, but a second may be allowed under certain circumstances. Scenarios where you’re relocating and haven’t yet sold your home, you’re going through a divorce or you’re co-signing a loan for someone can allow you to have two FHA loans at once.

The Bottom Line

Typically, only owner-occupied investment properties qualify for an FHA loan. You can purchase larger properties with five or more units by using FHA multifamily financing under certain circumstances, as outlined above. If your plan for the property falls under FHA multifamily requirements, you may qualify for financing. Otherwise, consider other loan options or a smaller property.

To get started with an FHA residential loan, apply online today! You can also give us a call at (833) 230-4553.