FHA mortgages are very popular for buyers looking to live-and-rent (live in one unit and rent the others). Unlike typical investment mortgages that require 25% down, down payments can be as low as 3.5% for an owner occupied multi-family. This provides a great opportunity to own an investment property and offset expenses with rental income. Depending on whether you purchase a 2-family or 3-4 family building, the qualification criteria will be slightly different. Here’s a closer look at FHA mortgage qualification for multi-family purposes.
2-Family Property Qualification
For a two-family purchase, lenders will consider the rental income from the second unit. 75% of monthly rental income will count towards mortgage qualification. Why only 75%? The other 25% is a cushion for potential vacancies and maintenance costs.
The unit that you plan to occupy must either be vacant or have a tenant-at-will. Since buyers are required by law to honor existing leases, it would be difficult to argue that you plan to occupy a unit when both are already leased.
3-4 Family Purchases & The Self Sufficiency Test
For 3 to 4 unit buildings, the criteria is a bit stricter. You can still obtain a low down payment of 3.5% and 75% of rental income can be used for FHA mortgage qualification. However, the property must pass the self sufficiency test. Excluding the unit that you plan to occupy, 75% of rental income from the remaining units must exceed monthly housing expenses. That includes the mortgage payment, taxes, and insurance.
Rental Income for FHA Mortgage Qualification
Since rental income plays an important role in the above calculations, it’s helpful to understand how rents are determined. If leases are in place, the actual rents will be used. For vacant units or tenants-at-will, the appriser will provide estimated market rents as part of their report.
Additional Considerations for FHA Mortgages and Multi-family Properties
In addition to a lower down payment, FHA is also more lenient with the source of down payment funds. In addition to your savings and the other common sources of down payment funds, you can receive gifts from family members. Lenders will likely require a gift letter confirming that the money does not need to be repaid. Contact us to learn more about financing options for your next purchase.