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Can I Purchase 2 To 4 Unit Property With FHA LOANS
Can I Purchase 2 To 4 Unit Property With an FHA LOAN with 3.5% down payment, live in one unit and rent out the other unit for rental income? What are the HUD GUIDELINES on buying a two-to-four unit multi-family home with an FHA loan?
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Yes, an FHA loan can be used to purchase a 2 to 4-unit property with only 3.5% down and live in one unit while renting out the others for rental income. Below are HUD guidelines and some key points to know:
FHA Loan for 2 to 4-Unit Property
Owner-Occupancy Requirement: You must occupy one of the units as your primary residence for at least 12 months.
Rental Income: The other units can be rented out. The rental income may help you qualify for the mortgage by increasing your DTI ratio.
Down Payment Requirements
Minimum Down Payment: With a credit score of 580 or higher, you need only put down 3.5% when using an FHA loan.
Down Payment Source: The money can come from savings, family gifts, or approved down payment assistance programs.
HUD Guidelines for Multi-Family Homes
Property Types: Only properties with two to four units are eligible. Each unit must meet minimum safety, livability, and marketability standards set forth by the FHA.
Appraisal Requirements: The Property must be appraised by an FHA-approved appraiser who ensures it meets HUD’s guidelines.
Self-Sufficiency Test (for 3-4 Units): If purchasing a three or four-unit dwelling, each unit’s rental income should theoretically cover its share of the mortgage payment (principal, interest, taxes, and insurance).
Qualifying with Rental Income
Using Rental Income to Qualify: Up to 75% of projected rents from other units can be used to qualify for a loan in the case of FHA.
Documentation Required: You will have to provide documentation, such as a lease agreement or market rent analysis, supporting those figures being considered part of your overall income stream during the underwriting process.
Credit and DTI Requirements
Credit Score: The minimum credit score is usually around 580, but if it is between this value and about 500-579, expect to make a larger down payment, namely 10%.
Debt-to-Income Ratio: The general rule says that your DTI ratio should not exceed 43%. However, if you have considerable savings or rental income, you may be allowed to go higher, even up to 50%.
Mortgage Insurance
Upfront Mortgage Insurance Premium (UFMIP): FHA loans require an upfront mortgage insurance premium equal to 1.75% of the loan amount. You can incorporate this into the loan.
Annual Mortgage Insurance Premium (MIP): The amount, which is divided into monthly payments, depends on the term and LTV.
Multi-Family Property Considerations
Property Management: You must plan how to manage these extra spaces. While renting out is possible with FHA financing, remember that being a landlord means dealing with tenants, maintaining premises, and ensuring lease rates cover monthly repayments.
Future Refinancing: If equity builds up in the Property after some years pass, it might enable refinancing through conventional lenders, thereby eliminating PMI, which ultimately leads to lower monthly installments, too.
Closing Remarks:
Using an FHA loan to buy a 2-4 unit home can be a great way to begin wealth creation with real estate. By renting out the other units and living in one, you will have rental income to help pay your mortgage. Just follow all HUD rules and be prepared for the duties of the owner and the landlord.
If there is anything else I can help answer or if you need more clarification, please don’t hesitate to ask!