FHA Home Loans – Borrower beware of your lender when buying or refinancing 3 Unit & 4 Unit properties
FHA Loan requirements have been changing all across the board in the last 18 months. When it comes to FHA loans for a borrower trying to purchase or refinance a triplex (3 unit) or a quad (4 unit), there are some important requirements that have changed.
For all maximum mortgage amounts on FHA Loans, regardless of the number of units. – FHA mortgage amount limits – Showing 1 family (single family units), 2 family, 3 family, & 4 family
Important things to know with multi unit properties with a FHA Loan
2 Unit Properties – Duplexes
Buying or refinancing a duplex with a FHA loan follows the same guidelines as it does for a single family dwelling. The only difference is that one of the units must be your primary residence and you can only use 75% of the rental income to help you qualify for that property.
3 Unit & 4 Unit Properties
This property still must be your primary residence, meaning that you must live in one of the units. The good news is that you still only need 3.5% down on the FHA mortgage. On a conventional loan, there are LTV restrictions and even pricing hit adjustments for the worse when it's a 2 to 4 unit. Some other restrictions or guidelines for 3 to 4 units with a FHA loan.
Self-Sufficiency Test – The borrower must meet this test for either a purchase or a refinance. The test states this : Gross rents less the vacancy factor for all units, including the owner-occupied unit, must be => the PITI for the subject property. The Vacancy Factor is explained here : FHA Vacancy Factor
In layman's terms, the total rents must be the same or greater of the total monthly mortgage payment, to include taxes, homeowners insurance, and the mortgage insurance. These rents must be determined by a FHA certified appraiser. Meaning that you can't use rental leases for this specific test. Self-Sufficiency Test info found in HUD 4155.1 2.B.4
Rental Income to qualify – You still need to also qualify with the normal debt-to-income ratios in regards to your income, in which you can use the rental income. But you can only use 75% of the rental income for the purpose of this qualification. As the primary borrower, you can't use what you would pay for that unit as rent to offset your mortgage. All you are including in order to qualify is your monthly gross income.
Reserves – When buying a 3 or 4 unit, you must have 3 months PITI in reserves. These reserves can't come from a gift. HUD 4155.1 Mortgage Credit Analysis – You do not need any reserves for a refinance.
Summary : These are normal HUD guidelines for FHA loans. Keep in mind that some investors and or lenders might have investor overlays, meaning that they can add to these basic guidelines.
KEY FOOTNOTE – You can't use an FHA mortgage to buy any type of property as an investment property. And for first time homebuyers, this is a great way to have someone help with your mortgage payment and to help build equity… by buying a 2 to 4 unit property.
Important Reminder – It’s cheaper to purchase a 3 unit or a 4 unit with a FHA Mortgage than with a conventional mortgage for several reasons, even if you have 700 + credit scores. Speak to me to find out these differences