In short – yes, you can buy a duplex with an FHA loan. In fact, the process of buying a duplex with this loan is a lot like buying a one-unit property.
FHA loans allow financing for houses with up to 4 units. This means that as long as you live in one of the units, you can rent out the rest and become a live-in landlord. If generating passive income and building home equity sounds like a good deal to you, then buying a duplex with an FHA loan may be the right path.
How to Buy a Duplex With FHA Loan
FHA loans are for owner-occupants only. This means that if you’re not planning to use the property as a primary residence, you’ve got the wrong loan – FHA-approved lenders will not lend to you.
If you want to purchase a duplex fixer-upper, you can also get an FHA 203(k) loan so long as the occupancy requirement is met.
You will be qualified for financing a multi-unit house you are also residing in if you qualify for the standard requirements set by the FHA.
FHA Loan for Duplex Requirements
Downpayment
FHA loans are known to have lower down payment requirements, at 3.5% for those with a credit score over 580, you will qualify for this rate. If your credit score is lower, you will need to pay a downpayment of 10% or higher. These rates are still true when it comes to buying a duplex or 2-unit home.
Credit score
As mentioned above, the minimum credit score for a 3.5% down payment is 580. However, note that these scores are just the guidelines of the FHA. Specific lenders may require higher credit scores.
Stable income and employment
Your work history for the past 2 years will be looked at. The FHA wants to lend to those who have a stable career and are likely to continue earning a stable income. This is to ensure that you are capable of paying off the loan.
DTI
In general, FHA requires a 43% DTI at most. It can go higher, but you need to have compensating factors like a higher down payment or higher credit score.
Using Rent to Qualify for FHA Loan
You want to know how you can increase your gross monthly income and decrease your DTI? Well according to FHA guidelines, 75% of the rent earnings from the unoccupied unit can go to qualifying income.
If you are only projecting the future income, the lender must complete HUD form 92561 to determine “Self Sufficiency Rental Income Eligibility.” This form is defined as the Rental Income produced by the subject Property over and above the Principal, Interest, Taxes, and Insurance (PITI).
According to HUD 4000.1, this is calculated by “using the Appraiser’s estimate of fair market rent from all units, including the unit the Borrower chooses for occupancy, and subtracting the greater of the Appraiser’s estimate for vacancies and maintenance, or 25 percent of the fair market rent.”
Loan Limits
Like any other loan, there are limits to how much you can borrow. For FHA loans, these limits vary by year and location. Multiple-unit homes also have different loan limits. Depending on your salary, a lender can also dictate how much loan you can afford.
When buying a property, it’s important to know early on how much you can borrow and to not shop close to your maximum budget since unexpected costs in closing and whatnot are bound to occur.
Refinancing With a Duplex
To save even more money down the line, refinancing is a great option. Refinancing your duplex from an FHA loan to a conventional one is common to avoid the higher monthly insurance payment costs. An FHA-FHA or streamline refinance can also be done, which can reduce your monthly insurance payments.
Can You Buy a Triplex With an FHA Loan
If you buy a multifamily property and live in one of the units, you can use an FHA Loan. That’s how it works for duplexes, triplexes, and fourplexes.
The difference is that when it comes to triplexes (3-unit home) or fourplexes (4-unit home) the process will be a little stricter. Why?
FHA Self-Sufficiency Test
Financing a triplex or a fourplex with an FHA loan is more difficult since these types of properties first need to pass the FHA Self-Sufficiency Test.
This test ensures that the total rent that you receive for the units must be equal or greater than the mortgage payment and other expenses – meaning that it is self-sufficient.
How does it work?
Here is how the Self-Sufficiency test works:
- The FHA sends an FHA-approved appraiser to the property.
- The appraiser calculates the market income for all units based on a rent survey.
- The FHA looks into the P.I.T.I. (principal payment, interest, taxes, insurance).
- If the mortgage amount is more than the net income you could bring in (income – P.I.T.I.), the property is not self-sufficient.
The Bottom Line
If you’re looking to earn rental income and build home equity, you can buy a multi-unit home (2-4 units) with an FHA loan and rent out the other units, given that you reside in one. The process and requirements are more or less the same with the standard FHA guidelines. However, buying a triplex or fourplex will require an additional self-sufficiency test which adds on its difficulty.
Making your first steps towards landlordship can be daunting. But with the right help, the journey to homeownership and passive income will be a smooth one. So if you have any questions, don’t hesitate to contact us!
Frequently Asked Questions
Can I rent out my house without telling my mortgage lender
Although unlikely, it is not advisable to do so since the lender can take action if you breach their terms. They could call on the loan and demand you repay the loan immediately. It just comes down to, would you be able to take that risk?
How long before I can sell my FHA home?
You can sell your FHA home as soon as it’s been 90 days since you owned it.
How many times can you use FHA?
You can have multiple FHA loans in your lifetime, but you cannot have more than 1 at the same time. There are exceptions to this rule, though.
