Buying a Multifamily Home with VA, FHA, and Fannie Mae Low Down Payment Loans

A very popular way to build wealth is through buying rental property. Although, significant funds may be required. Because of this, building a portfolio of rental properties could take a while. Yet, buying a multifamily home can be a beautiful thing and a quicker path to being the landlord. For instance, did you know that it is possible to purchase a 2 – 4 unit dwelling (dupex, triplex, quadruplex) as a primary residence? Therefore, a buyer may combine rental income benefits with primary residence loan advantages such as lower down payment and interest rates. Thus, many want to know the best way to buy a multifamily home. So, let’s discuss how to purchase a multifamily property when the buyer occupies one of the units and rents out the others.

“Being able to live in a home where the rental income pays part or all of the mortgage, builds wealth creating equity, and maybe even has a positive monthly cash flow. “

Russell Smith, Senior Mortgage Loan Officer – Blogger

Advantages of Buying a Multifamily Home

If a buyer is fine with having 1 – 3 other neighbors in the same building and does not mind being the landlord, there are a lot of potential benefits to purchasing a duplex, triplex, or quadruplex. Basically, it is like building an owner occupied business. Generally, multifamily buyers fall into two categories. One point of view is buying a primary residence, but looking to make the payment easier using rental income. Alternatively, a buyer’s primary focus may be towards purchasing investment property and does not mind living in the house. Either way, buying a multifamily home as a primary residence has huge advantages and is an easier way to build a rental portfolio.

Why Buy a Multifamily Home

  • Cover mortgage payment with rental income
  • Income tax deductions
  • Low down payment
  • Primary residence interest rates
  • Cash flow
  • Higher seller paid closing costs for buyer – reduce your cash to close
  • Rental units are all in one area – easier to keep an eye on properties
  • Build rental portfolio quicker

Overall, there’s may be one way to sum up advantages of living in and buying a multifamily home: Being able to live in a home where the rental income pays part or all of the mortgage, builds wealth creating equity, and maybe even has a positive monthly cash flow.

Using Rental Income to Qualify for Buying a Multifamily Home

Of course, the purpose of buying a multifamily home is to make rental income. In order to qualify for a mortgage, often buyers may use the existing lease or projected market rent.

Rental Strategy: Moving Out of a Multifamily

So, what if you already live in a multifamily property and want to rent out your unit? Or if buying a 2 – 4 unit dwelling and plan to live in a unit now, but eventually rent it out? Purchasing as a primary residence and eventually moving out to increase the rental is a popular strategy. Now, it is key to avoid fraud though! That means do not buy as a primary residence and never occupy the unit. Although, there is nothing wrong with occupying for the first few years and converting to a rental. Results could include increasing rental income cash flow, buying a single family for more privacy, or buying another multifamily to keep building the investment property portfolio.

If you think about it, buying a multifamily home and occupying one unit, then eventually converting to a full rental is a great way to build an investment portfolio. Then, buying another single family or multifamily property may be done using options mentioned below.

Mortgage Loans for Buying a Multifamily Home

When buying a duplex, triplex, or quadruplex, many just think of conventional loans and higher down payment. Sure this is an option, but there are actually more options including FHA, VA, and low down payment conventional loans. Each home loan treats a buyer occupying one unit of a multifamily home as primary residence purchase. Although, each has a few twists in the guidelines when compared to purchasing a single family home. Below, we provide many of the primary multifamily guidelines for a purchase and even a cash out refinance.

Getting an FHA Multifamily Loan

One of the low down payment mortgage options is an FHA multifamily loan. Because FHA allows for 3.5% down payment for buying a multifamily home up to 4 units, it is a popular option. Furthermore, buyers find that FHA loans have very flexible guidelines. Benefits include lower credit scores, gift fund down payment, higher debt ratios, and more. Thus, buying a 2 – 4 unit property is easier when it comes to FHA multifamily loan qualification.

FHA MultiFamily Loan Limits

Number of Units FHA Loan Limit
1 Unit $331,760
2 Unit $424,800
3 Unit $513,450
4 Unit $638,100

Additionally, it is possible to exceed the above limits when buying a multifamily home in a higher cost area. Therefore, using the FHA high balance loan limits come into play which are much higher.

Using Rental Income to Qualify for FHA Multifamily Loan

Not only can someone buy a multifamily property with 3.5% down payment, but one can also use rental income from the other units to qualify for the FHA multifamily loan. In order to use rental income, it depends on the buyer’s qualification as shown below.

Using Rental Income with Little or No Rental Experience When Buying a Multifamily Home

Use the lesser of…

  • Operating income reported on Fannie Mae Form 216/Freddie Mac Form 998, or
  • 75% of the lessor of:
    • fair market rent from the appraisal, or
    • rent from the lease or other rental agreement

Next, the calculated rental income from above is compared to the new mortgage payment for the property. Keep in mind, the payment must include principal, interest, taxes, insurance, and HOA dues (if applicable). Once the housing payment is subtracted from the rental income, the result is the net rental income or loss. Even if a loss, it is much better than qualifying at the full mortgage payment!

Using Rental Income with Rental History on the Property

If the borrower is looking to refinance a 2 – 4 unit property, the rental income is calculated using the last 2 years tax returns. Although, if the property has been owned less than 2 years, the calculation is figured for the period the property is owned. For instance if owned for 1 year, only one year proof of income is required.

How Do I Qualify for a VA Multifamily Loan With No Down Payment?

Some VA eligible buyers want to know, “Can I buy a multifamily home with a VA loan?“. Just think about all of the advantages we have mentioned on buying 2 – 4 unit properties. Plus, add VA loan multifamily benefits like no down payment or monthly PMI, then you get an unbeatable way for buying a multifamily home. Like other mortgage loans, VA has certain advantages and rules for buying a duplex, triplex, or quadruplex that you need to know.

VA Loan Multifamily Limits

Buying a multifamily home with a VA loan may not have a down payment requirement. Although, it does depend on some factors. Foremost, is the service member, Veteran, or surviving spouse entitlement available. Effective in 2020, full entitlement allows for no down payment with no loan limits. Yet if some entitlement is tied up, buying a new property involves using bonus entitlement. In these cases, VA still requires the use of conforming loan limits to determine down payment. Below, are the VA Loan limits for multifamily properties.

Entitlement Use County Single Family Duplex Triplex Quadruplex
Full Entitlement Most Counties No Limit No Limit No Limit No Limit
Bonus Entitlement Most Counties $510,400 $510,400 $510,400 $510,400
Full Entitlement High Cost Areas No Limit No Limit No Limit No Limit
Bonus Entitlement High Cost Areas $765,600 $765,600 $765,600 $765,600

Did you notice that the VA loan limit for bonus entitlement is the same for 1 – 4 units? Effective January 1, 2020, VA made a change that if using bonus entitlement to buy a multifamily home, only the single family home VA loan limit may be used in calculating the loan and potential down payment. Although, it could still mean a low to no down payment purchase with all the other VA loan benefits as well. So, VA loans certainly provide a solution to the question, “How to buy a multifamily home with no money down?“.

Using Rental Income to Qualify for a Multifamily VA Loan

In order to use a VA loan to buy a multifamily home, there are some requirements:

  • Cash reserves totaling at least 6 months of mortgage payments, and
  • Documentation of borrower’s prior rental property experience, and/or
  • Use of a management company to oversee the property

Amount of rent which may be used to qualify is based on 75% of the existing lease or the appraiser’s opinion. If the property is owned by the Veteran already, the tax returns are used to calculate the income. The rental income may be used only if…

  • The borrower has a reasonable likelihood of success as a landlord, and
  • Cash reserves totaling at least 6 months of payments (may not be a gift)

If using a VA cash out loan, the asset reserves must be from the borrower’s accounts. Therefore, the cash out from the property may not be used as reserves.

Freddie Mac and Fannie Mae Multifamily Loans

Unlike FHA and VA multifamily loans, using a conventional loan to buy a 2 – 4 unit property varies in down payment requirements. Down payment when buying a multifamily home with a Freddie or Fannie Mae loan is broken down as follows:

Multifamily Loan Down Payment Requirements

# of Units Down Payment Loan Limit **
2 15% $653,550
3 25% $789,950
4 25% $981,700

** 2020 conforming loan limits. Higher balance conforming loan limits are available for high cost counties.

Using Rental Income Buying a Multifamily Home with a Fannie Mae Loan

Recently, Fannie Mae released new requirements for using rental income to buy a multifamily property and even single family homes. Although, it did not change HomeReady guidelines for accessory unit rental income. The following are the Fannie Mae Rental Rules…

If the borrower… Then for qualifying purposes…
– currently owns a principal residence (or has a current housing experience), and
– has at least one year history of receiving rental income or documented property management experience
There is no restriction on the amount of rental income than can be used.
– currently owns a principal residence (or has a current housing expense), and
– has less than one year history of receiving rental income or documented property management experience
– for a principal residence, rental income in an amount not exceeding the PITIA of the subject property can be added to the gross income, or
– for an investment property, rental income can only be used to offset the PITIA of the subject property
– does not own a principal residence, and
– does not have a current housing expense
Rental income from the subject property cannot be used.

PITIA means principal, interest, taxes, insurance, and association dues. Source: Fannie Mae guidelines

Cash Out Refinance Multifamily Property

What if you are already an owner of a 2 – 4 unit property and looking to extract some of this equity built over the years? As mentioned, tenants help a multifamily property owner build equity. One option includes leaving the mortgage alone and just work hard towards paying off the mortgage. Yet, a cash out refinance of a multifamily home possesses several key advantages:

Multifamily Home Cash Out Advantages

  • Down payment on another primary residence
    • Easier to qualify for another home
    • Add more rental income when you move out
  • Down payment to purchase another investment property
  • Consolidate bills
  • Home improvements on this or other properties

Max Cash Out Refinance Multifamily Limits – Living in one Unit

Loan Type Max % of Appraised Value
Conventional Loan 75%
FHA Loan 80%
VA Loan 90%

What if the owner does not occupy one of the units? As a result, it is treated as an investment property. Otherwise known as non owner occupied. Regretfully, FHA and VA loans will not allow a cash out refinance when the borrower does not occupy one of the units. As shown below, conventional loans allows, though at a slightly less percentage.

Max Cash Out Refinance Multifamily Limits – All Units Rented Out

Loan Type Max % of Appraised Value
Conventional Loan 70%

With a successful rental situation, owning a multifamily home may be one of the best ways to quickly and affordably build an investment portfolio.

In summary, if you are considering buying a multifamily home, there are amazing low down payment loan options. Furthermore, current 2 – 4 unit property owners have solutions for consolidating bills, renovating, or even buying more properties with a multifamily cash out loan offered through VA, FHA, and conforming loans.

Do you have questions about qualifying for a multifamily loan? Reach out to us!

Russell Smith mortgage lender
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Written By: Russell Smith