FHA 4-unit multi-family to 5-unit?

Question

I'm currently looking at a 4-unit multi-family for my first home purchase. The property is currently fully rented with good tenants, however it has a very open and empty basement with the back exposed. I'm considering the possibility of buying the property with an FHA loan, and then finishing the basement into an owners unit. The property is currently zoned commercial. Are there any major problems I'll likely run into with this?

John Casmon · Answer

@Michael Crouse Couple issues you may need to consider. For FHA you have to intend to live in the building so this may be an issue if you're planning on living in a unit that is non-conforming right now. Also, going from 4 units to 5 units takes you into the commercial space which will alter financing options, especially if you look to refi or sell.  Also though the property may be zoned commercial, there still may be more steps to take to change the legal occupancy from 4 units to 5 units. You'll probably need to reach out to the zoning committee, but may want to check with your attorney.

Ben Biggs · Answer

Michael,

If the property is zoned commercial, would it still qualify for an FHA loan? Would that be something that would come up during the inspection process you will have to go through to get that FHA? I see that as the biggest red flag right now... if the property is already zoned commercial, than I don't see any reason why anyone would stop you from adding a fifth unit... but like John said above, definitely check with a real estate attorney. Also, adding the 5th unit would definitely affect your refinance in the future. I would also seek expert advice all the way through, and this is just me but I would be transparent with whoever you're borrowing from so that there's no risk of penalties or hurt feelings after you transform the residential into a commercial on an FHA residential loan.

Hope that helps, and best of luck!