FHA loans are primarily designed for residential properties.
But there are some circumstances where they can also be used for commercial properties. The criteria for obtaining an FHA loan for commercial properties differ greatly from those for residential properties.
In this article, we’ll explore the topic of FHA loans for commercial properties and help you understand what you need to know if you’re considering this option.
From eligibility requirements to the benefits and drawbacks of obtaining an FHA loan for a commercial property, we’ve got you covered.
So let’s dive in and explore together.
What is a Commercial Property?
A commercial property, according to the FHA (Federal Housing Administration), is a property that is used primarily for business or income-generating purposes, such as office buildings, retail spaces, hotels, and apartment complexes.
These types of properties are distinct from residential properties, as they are intended for commercial use rather than for personal residences.
The FHA has specific guidelines and requirements for commercial properties when it comes to financing, appraisal, and eligibility for FHA loans.
These guidelines are designed to ensure that commercial properties meet certain standards and are suitable for commercial use, in accordance with FHA regulations.
FHA Commercial Loan Requirements
FHA commercial loans have requirements that are different from standard FHA requirements for residential properties.
Commercial properties have unique considerations, such as property type, usage, and financial documentation, that may vary from the requirements for residential properties.
Here are some of the FHA commercial loan requirements:
- Credit rating: The credit rating required for a commercial loan isn’t different from the standard FHA credit requirements. A minimum credit rating of 580 is required to qualify for an FHA commercial loan.
- Down Payment: The down payment for an FHA commercial loan typically ranges from 15% to 35% of the property’s purchase price or appraised value. This is unlike the standard FHA down payment requirement where you pay 3.5% if you meet the required credit score.
- DTI Ratio: Your DTI (debt-to-income) ratio, the amount for monthly debt payments divided by gross monthly income, should be at most 43%.
Compared to the standard FHA requirements, here are the major differences:
| Factor | FHA Loan Requirements | FHA Commercial Loan Requirements |
|---|---|---|
| Eligible Borrowers | Individual borrowers. | Businesses, corporations, partnerships, and other legal entities. |
| Loan Amount | Maximum loan limits set by FHA based on location. | The loan amount is determined by the lender based on property value, the borrower’s creditworthiness, and the business plan. |
| Down Payment | Minimum down payment requirement of 3.5% for borrowers with credit score of 580 or higher. | Typically requires a larger down payment, often 20% or more. |
| Credit Score | Minimum credit score requirement of 500 with a 10% down payment, or 580 with 3.5% down payment. | Credit requirements may vary depending on the lender, but typically higher credit score required. |
| Loan Term | Up to 30 years. | Varies depending on the lender, typically shorter terms. |
| Mortgage Insurance | Required for loans with less than 20% down payment. | Varies depending on the lender and loan terms. |
| Appraisal | Required to determine the value of the property. | Required to determine the value of the property, but may also include income-producing potential for the commercial property. |
What Types of Commercial Properties Are Eligible for FHA Loans?
Some of the types of commercial properties that are eligible for FHA loans include:
- Healthcare facilities: You can use FHA loans to buy hospitals, nursing homes, and other healthcare facilities. These facilities must be licensed and regulated by the state and provide medical or health care services to their residents.
- Mixed-use properties: You can use FHA loans to buy mixed-use properties with commercial and residential units. These properties must be primarily residential, and the commercial units can’t exceed 49% of the total floor space.
- Multifamily properties: You can use FHA loans to buy multifamily properties such as apartment buildings, condos, and townhouses. These properties must have at least five units, and you must occupy one of the units as your primary residence.
Note that you may or may not be able to refinance the property with an FHA loan down the line. And if you intend to fund the renovation alongside the purchase with an FHA 203k loan, that will most likely be declined as well.
Benefits of FHA Loans for Commercial Properties
There are many benefits to financing a commercial property with an FHA loan. Here are some of the benefits if you’re considering it.
- Extended terms: FHA loans have terms of up to 35 years, allowing you to spread your payments over a longer period. This is particularly helpful for commercial properties, where cash flow may be less predictable than with a residential property.
- Low down payment: FHA loans require a lower down payment than conventional loans, making buying commercial properties with less capital easier. The down payment for FHA loans for commercial properties is generally around 15% to 20%.
- Lower interest rates: FHA loans typically have lower interest rates than conventional loans, which can save you thousands of dollars over the life of the loan.
Drawbacks of FHA Loans for Commercial Properties
You can’t have it all. Using an FHA loan to purchase a commercial property has its drawbacks as well.
They include the following:
- Complex approval process: The FHA approval process for commercial properties can be lengthy and complicated, requiring significant documentation and underwriting. This can delay the closing process and may require more time and effort.
- Limited eligibility: FHA loans for commercial properties are only available for certain types of properties, such as assisted living facilities and healthcare facilities, and multifamily properties. Other types of commercial properties may not qualify.
- Mortgage insurance: FHA loans for commercial properties require MIPs (mortgage insurance premiums) to be paid monthly. This can add to the overall cost of the loan and may make it less attractive to you.
If you’re looking to finance a commercial property in any of our service areas with an FHA loan, give us a call and we’ll tailor a foolproof process to bring your dream to reality.
Can I Use an FHA Loan to Purchase a Mixed-Use Property with Residential and Commercial Spaces?
Yes, using an FHA loan to buy a mixed-use property with residential and commercial spaces is possible.
However, there are certain requirements that you must meet, including:
- The property must have at most 25% of its floor space dedicated to commercial use. This means that at least 75% of the property must be residential.
- You must live in one of the residential units as your primary residence.
- You must also meet the loan requirements, such as having a minimum credit rating of 580 and a down payment of at least 3.5% of the purchase price.
Frequently Asked Questions
Are there any additional fees or costs associated with an FHA loan on commercial property?
Yes, additional fees or costs may be associated with an FHA loan on commercial property. These can include an appraisal, inspection, title fees, and other closing costs, most of which depend on how much you qualify for. You may also be required to pay MIPs (mortgage insurance premiums) for the loan.
How long does it typically take to get approved for an FHA loan on a commercial property?
The time it takes to get approved for an FHA loan on a commercial property can vary depending on several factors, like the property type and your qualifications. It should take between 30 and 60 days for a loan application to be approved.
To accelerate the approval process, make sure you have all the necessary documentation and information ready for your lender. This includes business plans, credit reports, financial statements, and property information. Your lender will also perform an appraisal and inspection on the property, which can take some time to complete.
What are the interest rates for FHA loans on commercial properties?
The FHA does set limits on the amount of interest that can be charged on an FHA loan. These limits fluctuate depending on the type of FHA loan you are using. The types of loans include:
- FHA 223(f) loans: These FHA loans are used to finance the acquisition, refinancing, or rehabilitation of multifamily properties. The interest rate is typically fixed for the entire loan term. The interest rates for FHA 223(f) loans usually range from 2.5% to 4%.
- FHA 221(d)(4) loans: These FHA loans are used to finance the construction or rehabilitation of multifamily properties. The interest rate is typically fixed during construction, after which it becomes a permanent, fixed-rate loan after construction is complete. The interest rates for FHA 221(d)(4) loans range between 2.65% and 3.75% during the construction period and 3.50% and 4.75% for the permanent loan.
What are the maximum loan amounts for an FHA loan on a commercial property?
The maximum loan amount for an FHA multifamily loan varies depending on the location and size of the property.
Here is a breakdown of the maximum loan amounts for FHA multifamily loans:
- Metro areas: In areas with populations of 50,000 or more or part of a larger metro area, the max loan amount is $1,469,050, $1,800,200, $2,176,200, and $10,948,500 for properties with four, five, six and over 50 units respectively.
- Non-metro areas: In areas with less than 50,000 people or not part of a larger metro area, the max loan amount is $1,140,000, $1,403,400, $1,695,600, and $8,091,000 for properties with four, five, six and over 50 units respectively.
What’s the application process for an FHA loan on commercial property?
The application process for an FHA loan on commercial property involves several steps,
- Pre-qualification: You should pre-qualify with a lender to determine whether you meet the qualifications for an FHA loan on commercial property.
- Application: This involves providing detailed information about your assets, debts, income, and the property you’re interested in buying.
- Documentation: You’ll need to provide documentation of your income, such as bank statements, pay stubs, and tax returns.
- Underwriting: Your lender will review your information and determine whether you meet the FHA’s underwriting guidelines.
- Approval: If your application is approved, you’ll get a loan commitment letter outlining the loan terms, including the interest rate and loan amount.
- Closing: Once you’ve received loan approval, you must schedule a closing, during which you’ll sign the loan documents and transfer ownership of the property.
So, Should You Get That Property?
Well, to sum it all up, FHA loans are a viable option if you’re looking to buy commercial properties. However, these loans have their own specific requirements and limitations.
They also do have benefits that depending on your financial situation may outweigh the drawbacks.
If any of this is lost on you, feel free to contact us and we’d help to guarantee you buy commercial real estate and profit from it.
