3.5% Down on Owner-Occupied Duplex or Triplex? Is that Realistic?

Question

Hi! I am looking to buy a 2-3 unit multifamily in Southern California. Is it realistic to plan to put 3.5% down with an FHA loan? I'm aware of 0% down programs like NACA, but I do not qualify since I already own. I would love to know learn how you financed your purchase with little down.  At this time, I'm not interested in partnerships or loans from family/friends. Looking for any tips to put little down for a multiunit.

Brad Sneckner · Answer

@Melody Rault The idea behind an FHA loan is to make it as easy as possible to get into the property. It has more lenient guidelines all around. But the Mortgage Insurance (PMI) is a noticeable cost on the loan. You MAY want to refinance into a conventional loan as soon as possible, but that will depend on the equity in the property, and the rates at that time when you are considering it. If you're at a 3% FHA rate and your PMI is 0.85% (which it is on FHA), you're still paying less than 4% total, so if the conventional rate is 4%+ in a couple of years when you're looking at refinancing, then it may not make sense anyway. On this kind of property, it's all about cost/benefit analysis.

Tyler's information above is spot on. He and I work together on these kinds of deals pretty regularly, so if you need something locally in SoCal, definitely hit him up. He's a rockstar agent.

Brad Sneckner · Answer

Dang @Tyler Hungerford... You'd make a pretty decent lender. HA!

@Melody Rault Tyler is spot on. The FHA low down payment is a great option when you're going to move into one of the units. A lender that knows the rules on this is crucial. Feel free to reach out if you have more questions. Good luck!

Winston Covington · Answer

FHA financing is a great way finance the purchase of a 2 to 4 unit property with a small down payment.  * Note *  These type of loans require the purchaser to occupy one of the units.

Tyler Hungerford · Answer

Hi Melody! This is a great question and I've been hearing it more and more lately. Using the FHA loan option can be VERY beneficial for you in order to get your foot in the door to purchase property. Please note that you'll need to have at least 3-6 months of rental reserves in the bank in order to cover vacancy periods. Also, the rent from the 3+ units has to cover the mortgage payment by at least $1. Something you'll need to consider when making offers. That might mean you'll need to put more money down in order to lessen the mortgage payment so it matches total rents or potential future rents. Those numbers are determined by the appraiser. Another thing to consider, low down conventional loans won't work for 2+ units, so if someone says you can do a 5% conventional loan on the purchase of a multi-family unit, they're wrong. If you're going to use an owner occupied conventional loan it has to be a minimum of 15% down. If you go that route then you don't have to have the rent cover the cost of the mortgage payment and you don't have to have the reserves in place to cover rent for multiple months. Hope this helps!

Melody R. · Answer

Thank you, all, for answering my question.

@Winston Covington Do or did you have an FHA loan? How was your experience?

@Tyler Hungerford So much good info, thank you! I did not know about the $1 rent cover rule at all. Where did you find this info?

@Brad Sneckner from a lender's perspective, do you see any drawbacks to the FHA loan besides MIP. Are they hard to close? I read that they are good short-term options that should be refinanced out of within 5 years if I plan to keep the property.I found this Freddie Mac Fact Sheet for LTV breakdown.  Is there a good resource to stay on top of requirements and loan products? I recently learned about the Home Possible Loan and would like to compile a list of loan products that I can discuss with lenders. And I pulled this from fhalenders.com

California FHA Loan Requirements for 2021

These are the basic FHA loan requirements for this year. All of these must be met to be approved for an FHA loan. If you are not positive on whether you meet these standards or have questions, an FHA lender can help.

• Down payment of 3.5% or 10% if your credit score is below 580
• 2-year employment history with some exceptions allowed
• Fully document your income for the past two years
• Minimum FICO score requirement of 500 – down payment will vary
• Mortgage Insurance Premium (MIP) is required for every FHA loan
• Maximum debt to income ratio of 43% with exceptions up to 56%
• The home must be your primary residence
• No bankruptcies or foreclosures in the past two years

3.5% Down on Owner-Occupied Duplex or Triplex? Is that Realistic?

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