Two-To-Four Unit Multi-Family Home Mortgage Loans
In this article, we will cover and discuss qualifying for two-to-four unit multi-family home mortgage loans. One to four-unit residentially zoned properties is eligible for owner-occupant primary resident mortgage loans with HUD, VA, USDA, Fannie Mae, and Freddie Mac. Non-QM mortgage lenders also consider a one to four-unit property as a residential property and owner-occupant financing guidelines apply. In the following paragraphs, we will cover qualifying for two-to-four unit multi-family home mortgage loans.
Buying Two-To-Four Unit Multi-Family Homes
A great way to get started in investing in real estate is to purchase a two-to-four unit multi-family home as your first home. HUD, the parent of FHA, allows homebuyers to purchase a two-to-four unit multi-family home with a 3.5% down payment. The homebuyer needs to live in one of the units and can use the rental income to offset their mortgage payments. You can actually use 85% of the rental income on the rental units as qualified income. Buying a two-to-four unit multi-family home will give you a head start in your journey in developing your investment portfolio.
How Difficult Is It To Get a Multi-Family Home Mortgage Loans
FHA loans are the easiest multi-family home mortgage loans you can go for with owner-occupant units. FHA loans only require a 3.5% down payment on one to four-unit owner-occupant homes. VA loans do not require any down payment. However, VA loans are only limited to eligible active and retired members of the U.S. Military. Conventional loans require a 15% down payment on owner-occupant primary homebuyers of multi-family properties. Non-QM loans require a 20% down payment on multi-family home mortgage loans.
General Lending Requirements on Multi-Family Home Mortgage Loans
As mentioned earlier, the following are the basic mortgage guidelines on qualifying for multi-family home mortgage loans. Every mortgage loan program has its own guidelines on multi-family home mortgage loans. Multi-family homes are in demand in cities like Chicago where they are getting under contract the minute they are listed.
One great advantage of buying a two-to-four unit multi-family home is after you live in the multi-family home for at least one year, you are eligible to purchase a single-family owner-occupant home again. You cannot purchase another multi-family home after buying your first one.
HUD Guidelines on Multi-Family Mortgage Loans
HUD, the parent of FHA, requires a 3.5% down payment on a two to four-unit multi-family owner-occupant primary home. You can use 85% of the potential rental income as qualified income. One-unit homes do not require reserves. If the one-unit home was a manual underwriter, one month of reserves is required. Two-unit multi-family buildings require a one-month reserve.
Reserves on Multi-Family Home Mortgage Loans
Three and four-unit multi-family home mortgage loans require a three months reserve. Reserve funds cannot be gifted and need to be the borrower’s own funds. FHA loans are hands down the best multi-family home mortgage loan option due to the lax agency guidelines. You only need a 3.5% down payment to purchase a multi-family home with an FHA loan as long as you have a 580 credit score. If your credit scores fall under 580 FICO and down to 500, a 10% down payment is required.
Can You Use Rental Income on Multi-Family Properties
Most mortgage lenders allow you to be able to use rental income and/or potential rental income on multi-family properties. This holds true even in vacant units. The rental income used will be based on the appraiser’s analysis of the market rent for a like and similar rental unit. On FHA loans, the proposed rental income from the appraiser can be used.
On rental units that are not currently leased and/or rented, then the following limited or no history of rental income form applies:
- Fannie Mae form 1025 or Freddie Mac form 72 – Small Residential Income Property Appraisal Report.
- If available, prospective leases.
Multi-Family Home Mortgage Loans Require Self-Sufficiency Rental Income Test
Buyers of three to four-unit multi-family homes need to make sure the property passes the self-sufficiency rental income test. The rental income from the rents of three to four-unit multi-family units is used to determine whether the property passes the self-sufficiency rental income test. With HUD, the parent of FHA, what the agency wants to make sure of is that when you are purchasing a self-sustaining three to four multi-family homes, the property will be self-sustaining. What this means is that the rental income will be able to cover the mortgage payments.
Understanding The Self-Sufficiency Rental Income Test
The way you pass the self-sufficiency rental income test, you need to prove that 75% of the aggregate total income you are getting from the multi-family property will exceed the full monthly mortgage payment. This is done by comparing the borrower’s Principal, Interest, Tax, Insurance (PITI) and taking the total rents, and multiplying by 0.75%. If 75% of the rental income is equal to and/or greater than the borrowers’ PITI, you have passed the self-sufficiency rental income test.
How To Start The Pre-Qualification Process To Shop For Multi-Family Homes
The pre-qualification and pre-approval process is easy. First, contact us at Non-QM Mortgage Brokers and you can talk to one of our loan officers. We are available at 262-716-8151. Text us for a faster response. Or email us at gcho@gustancho.com. The team at Non-QM Mortgage Brokers is available 7 days a week, evenings, weekends, and holidays.