FHA multifamily loans: Become a homeowner with government support

What you’ll learn

— How FHA multifamily loans work compared to FHA single-family loans

— How to qualify for an FHA multifamily loan

— Pros and cons to help you make a decision

— Alternative loan options

Federal Housing Administration (FHA) loans have helped millions of buyers access single-family homes that might otherwise have been out of reach. But what if you’re eyeing a multifamily property instead? Can the FHA make that possible, or will they turn you away?

In this guide, you’ll learn how FHA multifamily loans work, what you need to qualify, and how to decide if they’re right for you.

What is an FHA multifamily loan?

You can use an FHA loan to buy a small multifamily home because properties with two to four units aren’t classified as multifamily under FHA. They count as single-family homes, which keeps them eligible. This means you can buy a multifamily home with an FHA loan, making it ideal for owner-occupancy situations where you live in one unit and earn rental income from the others. These loans also come with perks like a low down payment and competitive interest rates.

...in as little as 3 minutes – no credit impact

What are the requirements for an FHA multifamily loan?

FHA multifamily loans have requirements buyers must meet to qualify. These involve both the borrower’s finances and the property itself. Let’s break down what you need to know.

Owner-occupancy

FHA loans for multifamily properties come with one key requirement: You must occupy one of the units yourself for at least one year. While you can rent out the other units to help cover your mortgage, FHA-insured loans aren’t purely meant for investment properties.

Income

A steady income shows FHA multifamily lenders that you have the ongoing funds to manage your mortgage payments. If you plan to include projected rental income from other units, you’ll need a Small Residential Income Property Appraisal Report (Form 1025). This appraisal evaluates both the market value of the property and the potential rental income it’s likely to generate.

Credit score

You’ll need a minimum credit score of 500 to secure FHA financing for a multifamily home, though individual lenders may have their own requirements. If your credit score is 580 or greater, the down payment requirement drops from 10% to 3.5%.

Debt-to-income (DTI) ratio

Your DTI compares how much of your gross monthly income goes toward paying down your debts. There are two types. Front-end DTI measures how much you spend on the mortgage payment: principal, interest, taxes, and insurance. Back-end DTI focuses on how much you spend on all your debts combined, such as credit cards and auto loans.

FHA requirements include a front-end DTI of no more than 31% and a back-end DTI of no more than 43%.

Mortgage insurance

Mortgage insurance is a common lender requirement to protect them against borrower default, but it works a little differently with the FHA program types. The mortgage insurance premiums (MIPs) have two parts:

— Up-front FHA MIP: This costs 1.75% of the loan amount, and you only pay it once when you finalize the home purchase.

— Annual FHA MIP: The annual FHA MIP is folded into your monthly mortgage payments. Your loan-to-value (LTV) ratio and term length affect the payment's percentage and duration. For example, if you put down less than 10% (LTV above 90%), you’ll pay MIP for the life of your loan. If your down payment is 10% or more (LTV 90% or below), it remains for 11 years.

FHA multifamily loan pros and cons

Like any mortgage type, FHA multifamily loans have benefits and drawbacks. Here are the biggest ones to keep in mind.

Pros

— Lower interest rates: FHA loans tend to offer more favorable interest rates, especially for borrowers with credit scores on the lower side. Better’s FHA, conventional, and VA loans come with competitive rates that make homebuying more affordable than you think.

— Flexible credit requirements: FHA loans use more flexible credit criteria, so more first-time buyers and those with imperfect credit can qualify.

— Smaller down payments: FHA loans allow down payments as low as 3.5%, making the up-front costs of homeownership more affordable.

— Rental income potential: With multifamily properties, you can rent out unoccupied units to generate additional income. This strategy is sometimes called “house hacking.”

Cons

— Loan limits: The FHA caps how much you can borrow based on the property’s location and number of units. If you need a larger loan, you’ll need to explore other financing options.

— Stricter appraisal process: FHA appraisals are more thorough than standard appraisals. In addition to estimating the home’s market value, the appraiser checks that the property meets the minimum standards the Department of Housing and Urban Development HUD sets for multifamily homes. These cover elements like electrical systems, structural integrity, and roof conditions. While these protections can help buyers, they may also increase appraisal costs and disqualify properties that don’t meet the requirements.

— Mortgage insurance premiums: The up-front payment for FHA loans is typically 1.75% of the amount borrowed, adding to your closing costs. Annual premiums are included in your monthly payments and may last either 11 years or the life of the loan, depending on your original LTV and loan term.

...in as little as 3 minutes – no credit impact

What are the FHA multifamily loan limits?

These are the loan amount caps for FHA multifamily loans in low-cost-of-living (LOCL) and high-cost-of-living areas (HCOL) as of writing:

— Duplex: $671,200 in LOCL areas to $1,548,975 in HCOL areas

— Triplex: $811,275 in LOCL areas to $1,872,225 in HCOL areas

— Fourplex: $1,008,300 in LOCL areas to $2,326,875 in HCOL areas

Is an FHA multifamily loan the right choice for you?

An FHA multifamily loan might make sense for your situation if you want to:

— Offset mortgage costs: Renting out extra units can help reduce your monthly mortgage payments. The trade-off is that you have to manage tenants, collect rent, and maintain the property.

— Get a good deal with less-than-perfect credit: Because FHA loans are government-backed, they generally offer more flexible credit requirements and competitive rates.

— Accelerate your homebuying journey: With down payment requirements as low as 3.5%, FHA loans make it easier to become a homeowner sooner than many conventional mortgages.

Alternative loan types for multifamily properties

FHA loans aren’t the only type of financing available for multifamily home purchases. Other possibilities include:

— Conventional loans: Conventional loans are standard mortgages that private lenders offer without government insurance. If you have a strong credit profile, a conventional loan can be just as affordable as an FHA loan. You can also sidestep the owner-occupancy requirement if you’re looking for an investment property rather than a home.

— Commercial loans: A commercial mortgage is a loan designed for income-generating properties, including buildings with five or more units and mixed-use spaces. Lenders evaluate these loans primarily based on the property’s rental income potential rather than just the borrower’s personal finances. Because commercial loans carry more risk, interest rates are typically higher than residential loans.

Multifamily financing made simple with Better

FHA multifamily loans might be the way to go if you want favorable terms with less stringent credit requirements. If that fits your description, check out Better. We offer competitive FHA loan rates that fit comfortably into your budget.

Better makes everything as simple as possible, whether you’re a first-time buyer or an experienced investor. And if you have questions, our support team is standing by 24/7 to guide you every step of the way.

Get pre-approved in as little as three minutes to take one big step closer to your dream home.

...in as little as 3 minutes – no credit impact