Purchase a Multi Unit Family Home with an FHA Loan

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Did you know that clients purchasing a multi unit property (2-4 family home) can use rental income from units they aren’t occupying to qualify?  That’s right!  FHA loans don’t just work for single family homes.  They can also assist buyers interested in purchasing income producing properties.

So how does this work?  It’s simple!  The rent for a multiple unit property where your buyer intends to live in one or more units and charges rent to tenants of other units may be used for qualifying purposes.

There are two circumstances where projected rent for the tenant-occupied units may be considered. 

1. We can use the gross rental income only after deducting the FHA’s vacancy and maintenance factor (ask your lender for these figures or check HUD’s website: FHA Vacancy Factor)
2. Your client is able to pass the Self-Sufficiency Test.  The test states that the buyer may not gross up rental income to directly offset the mortgage payment. 

Multi Unit Properties – Additional Criteria

The multi unit family home must be “self-sufficient” as determined by the following test calculation:

Total monthly mortgage payment ÷ projected rent (as determined by the appraiser) for ALL units (including the owner-occupied unit) minus the FHA vacancy and maintenance factor (or the appraiser-determined vacancy factor if higher) = 100% or less.

Here’s an example of what a scenario might look like:

Your client is interested in purchasing a 4-unit property with total rents received in the amount of $4,000 ($1,000 per unit) – $600 (15% vacancy and maintenance factor) = $3,400

The total projected monthly mortgage payment on your buyer’s new mortgage is $3,350 (PITI plus HOA dues)

$3,350 ÷ $3,400 = 98.5% – Self-sufficiency test passed!

If the property didn’t pass the test, we would be required to reduce the loan amount by whatever number needed to decrease the monthly mortgage payment enough to pass.  These are numbers any Loan officer can estimate and work up before an offer is made.  Granted, the appraiser could skew those figures but it’s doubtful they’ll be terribly different than the ones supplied at the beginning. 

How Does My Buyer Qualify?

Other than the details listed above, qualifications for this loan are very similar to a FHA purchase of a single family home with one remaining MAJOR detail to take note of.  Whenever you have a buyer purchasing a multi unit property, they will need to prove assets to cover their 3.5% down payment PLUS 3 months’ worth of reserves.  Gift funds are not allowed for reserves, but can still be used for the down payment.

And finally, FHA is still an owner occupied only program.  Provided your buyer will be occupying one of the units attached to the multi family home, they could well be on their way to not only homeownership but the cash flow associated with being a real estate investor!

Interested in other FHA programs?  Check out the FHA 203k!