Insider Secrets: Buying a Duplex You Can't Afford

Buying a duplex as an investment property can be expensive and require a 25% down payment. What if you want one now but it’s out of your price range and you don’t have a big down payment?

FHA loans can be the answer if you’re willing to live in the duplex for 1 year. Living there for a year will allow you to get an owner occupied loan rather than the more expensive investment loan. Getting an owner occupied loan and living there less than a year is what the government has nicknamed “fraud.”

When using an owner occupied FHA loan for a duplex you only need a 3.5% down payment and are allowed to use 75% of the estimated rental income from the other half of the duplex to help you qualify for the loan. So, you can get a bigger loan than you can afford yourself because your income has increased from being a future landlord. You don’t even need landlord experience to qualify. But, it can be tough to find a lender willing to give you the loan if you only have the minimum 3.5% down. Talk to a few lenders and find one that will give you the loan before you proceed. Keep in mind it’s free to ask questions and get preapproved from a lender.

Example: If you were able to find a duplex with a $2,000 a month mortgage and you could rent one side for $1,200 a month, the lender would subtract 75% of that rental income (=$900) from the monthly mortgage payment and you would now only need to qualify for $1,100 a month.

Keep in mind that FHA has mortgage insurance for the life of the loan. If you pay off 20% of the value of the property (or it increases in value due to rehab and/or appreciation so that you own 20% of its current value) you can refinance into a loan that doesn’t have mortgage insurance and potentially cut your payment. Refinancing isn’t free and you never know what interest rates are going to do in the future so don’t get into a bad deal hoping it will get better later. You might be stuck with this loan.

“The difference between successful people and really successful people is that really successful people say no to almost everything.” – Warren Buffet