August 5, 2021

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How to Finance a Duplex or Multi Unit Home — Mortgage Guide

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Passive rental income is a dream for many investors looking to achieve financial independence. A Gallup survey 2019 found that real estate was the preferred investment option for Americans, more than stocks or savings.

However, the reality is that buying a multiple unit home is a serious financial endeavor with unique credit requirements that can often mean a larger down payment. Also, experts say you should have good credit and significant cash savings before trying your luck as a landlord. The ongoing Costs and headaches as a landlord In fact, NextAdvisor employee Jannese Torres-Rodridguez ended up in therapy, she wrote recently.

Pro tip

Make sure that not only are you saving your down payment, but a healthy one too Emergency fund for home maintenance. As the owner of an apartment building, you are responsible for repairs to the residential units of your tenants.

One of the steps in researching rental properties is to become familiar with the types of loan products you need and the qualifications required. Here you will find an overview of the financing of a duplex, apartment building or commercial property.

Duplex, Multi-Family or Commercial Properties: What’s the Difference?

  • An apartment building could be used to describe larger apartment buildings. It is most commonly used to describe buildings with two to four units.
  • A duplex is an apartment building wwith only two units.
  • A commercial residential property is one with five or more units.

The financing available depends on the number of units. Properties with four or fewer units are usually considered residential property, experts say.

“For most of the banks I’ve worked and spoken with, from a single family to a four-family family, they would consider living in the great outdoors,” Madden said. “They would look at it and qualify someone the way a residential mortgage would be considered. Only when they look at five or more units do they consider it a commercial property and look less at comparable sales and more at the potential income the building can bring. “

Loan options for duplex and apartment buildings

1. Conventional Loans

Just like when buying a single family loan, a conventional home loan is a popular option for buying a two to four unit apartment building. Loans are usually available in amounts of $ 702,000 for duplex apartments to more than $ 1 million for four-unit buildings. In areas with high costs, the limit values ​​are higher. The down payment and credit requirements vary slightly depending on the size of the home.

For a Duplex, Buyers must have a minimum of 15% deposit. The creditworthiness requirements vary depending on the deposit and payment Debt-Income Ratio (DTI) but range from 640 to 700.

For a three- or four-unit apartment building, buyers must have a down payment of at least 25% and a credit score between 660 and 680, depending on the borrower’s DTI.

These numbers are based on Fannie Mae’s requirements that lenders often use as a standard.

2. FHA & VA loans

Buyers can also use FHA and will Loan to purchase an apartment building supported by either the Federal Housing Administration or the Department of Veterans Affairs.

For an FHA loan, borrowers must have one deposit of at least 3.5% and a minimum credit rating of 580. For larger down payments, a credit rating can only be 500. VA loanAvailable only to current and former service members, do not require a deposit. The VA does not set a minimum creditworthiness requirement, but individual lenders do.

For both the FHA and VA loans, at least one borrower must plan to occupy the property. In addition, HUD requires multi-family houses to be purchased with them FHA loans are self-sufficient.

“For an FHA loan, you have to follow the self-sufficiency rule,” said Jeffrey Loyd, Mortgage broker and founder of Mortgage Acuity in New Jersey. “That means that the rental income for all units must be sufficient to make the payment – principal, interest, taxes, insurance. This is more difficult in some markets. Mortgage underwriting assesses the risk of default. The bank wants to know that if you default, the rental income will cover the monthly costs. “

3. Commercial loans

The rules also change for apartment buildings more than four units. For an individual seeking a commercial real estate loan, financing is typically available at a fixed rate of up to $ 6 million POOR (Adjustable rate mortgage) options. These loans require a down payment of at least 20% and a Credit score of at least 680.

“You can still get a fixed rate and you can still do ARMs,” Loyd said. “ARMs are more common on commercial loans. The down payments are larger. The loan amount is based on the rental income. The rents have to cover the debts. “

Why it matters whether you live there or not

The financing process looks a little different depending on whether you want to live in the apartment building you are buying. Whether you are a resident or an investor will affect your down payment, the interest rate and the type of loan to which you are eligible.

“The main occupancy of residence when you are staying in one of the units offers better interest rates and lower down payments,” he said Paul Carini, Division President of Dash Home Loans. “Investment occupancy when you don’t live there requires more down payment and offers worse interest rates.”

Buying a property as an investor rather than a resident also limits your credit options. FHA and VA loans are only available if the buyer lives at home. So you are limited to a traditional mortgage.

Rental income as a qualification for a loan

One of the things about buying an apartment building is that rental income from the property – both current and future rental income – can help you qualify for the loan.

“For traditional investment property home loans, the income from leases minus 25% can be used and offset the mortgage payment upon qualification,” Carini said. “Leases usually have to last at least 12 months to be counted. You can also use a rating to evaluate the market rent. A vacancy rate of 25% is usually built into this number. “

Barriers to financing a duplex or apartment building

There are a few hurdles you may encounter when financing an apartment building.

“Assessment can be a problem at times,” said Carini. “Reviews use comparable sales to evaluate a home. Because an apartment building can be a unique type of property, there may not be many comparable sales available for consideration. If you get an undervaluation, it could mean you need to bring more cash to the closing table. “

The valuation could also be a problem as it helps determine how much rental income can be considered a qualifier for the loan. The lower the market price of an individual unit is for the appraiser, the lower the rental income that the lender is willing to consider.

Another possible hurdle is the down payment. Apartment buildings often require higher down payments than a single family home. According to Loyd, maisonettes typically require a minimum of 15% down payment, while three and four unit properties require a 20% down payment. It’s significantly higher than the 3% -5% you could get on a conventional single-family mortgage.