Published on Sunday, May 21, 2017 by Land Century
Duplexes and multi-family properties are able to be mortgaged even if they have four units available.
Apartments or larger properties are out of the scope of this post. For this type of development or property, you would need to secure a commercial loan, or try and secure crowdfunding.
And there are different options, depending on what you choose to do with the property. Lets explore a few circumstances and options that youll have when purchasing a multi-family property.
If you choose to live on the property, too, you have more options available to you. Anyone that is an owner-occupant will be able to secure a traditional mortgage, or they can choose other options, such as:
- FHA Loans: The Federal Housing Administration offers loan options that protect the lender in the event that the borrower defaults on the loan. When securing an FHA loan, youll also benefit from less stringent qualification requirements and lower loan rates, too. FHA loans also require just 3.5% down on the loan, which is far less than conventional loans require.
- Veteran Affairs: Veterans can try and secure lending through veteran affairs. Loans provided through here (VA loans to be precise), do not require mortgage insurance and are not subject to a minimum credit requirement. Private lenders will fund the loans, and the Department of Veteran Affairs will guarantee the loan.
Conventional loans are available, but the above two loan types are more favorable, so youll want to explore them first before trying to go the conventional route. Conventional loans have stricter lending rules and regulations, and are also costlier in terms of needing mortgage insurance and higher interest rates.
Investor Only Options
If you dont plan on living in the unit and are only investing in an effort to rent the unit or sell it in the future, youll have less financing options open to you. Unless the investor has the upfront capital to purchase the property on their own, theyll need to go through conventional lenders.
And the problem with this is that the investor will be required to put down a hefty down payment if they hope to get the mortgage they need for their duplex or multi-family dwelling.
The norm for a down payment from an investor is:
- 20% down as a minimum for a duplex
- 25% down for a multi-family home larger than a duplex
So, as you can see, you may be stuck with a large down payment that may be impossible to pay given your finances.
Rental Income Qualifications
Investors may also be able to use rental income as a qualification for a loan. This isnt a 100% guarantee, and certain lenders may or may not offer this option to you. But this is a good option if its available.
Say, for example, youre going to buy a multi-family unit that already has tenants that have signed leases. In this case, you may be able to use these leases to be able to qualify for the loan. Of course, if youre going to buy a newly built property, this will be an impossible feat because lenders will require lease agreements if you choose this route.
Lenders are reluctant to offer loans higher than the borrowers income, but if you have rental income, you may be able to take out a larger loan.
Keep in mind, lenders will need reassurance that theyll get paid, so they will often not be able to base the rent off of market rates in most cases. There are exceptions to the rule, so youll want to contact potential lenders to see what they will offer you in terms of financing if you dont have tenants already living in the property.
If youre a developer or plan on constructing a multi-family unit for rent, you do have the option to try and secure crowdfunding. This concept is relatively new in the world of real estate, but its a fast way to get financing if you have a plan that is sound.
Crowdfunding sites will allow you to:
- Post projects
- Receive funds from multiple people
But youll need to ensure the terms are in your favor. You may need to offer high returns indefinitely, depending on the route you choose to take. If youre offering partial ownership in the property, youll give up some of your profits in return.
These crowdfunding options have very strict policies on which projects are allowed to be passed on to potential investors, so you need a sound and professional plan when seeking this option.
When all else fails, you may have the option of choosing owner financing. This allows you to effectively take out a loan from the seller of the home. The advantages of this type of loan is that there are far less strings attached.
Credit is also less important in the case of owner financing, meaning that youll be able to get financing with bumps and bruises on your credit.
The downfall is that the interest rate may be higher with this type of loan.
But you can also buy a property using this tactic and start renting it out. The one thing I do recommend is getting all of the details in writing and having a contract lawyer look over all of the fine details for you.
So, whats the best options to finance a multi-family home?
If we had to pick just one option, it would be the FHA loan due to the low down payment required. VA loans are also favorable, but with a VA loan, you do need to be a veteran, which is obviously not something that you can just do overnight.
Conventional lending practices are safe, too. These practices allow you to purchase a property by getting a loan from your local bank. If you have a down payment that meets the requirements and the finances in place, youll find that this is a great option.