FHA Loan on 4-Plex...Can't be done?

Question

If anyone knows the answer to this question, I would really appreciate your input!

I am helping a friend find a 4-plex to buy with an FHA loan. He is a first-time home buyer and will have no problem qualifying for the loan. I hear references to FHA loans used to buy 4-plexes all the time on BP, but here is the problem:

Every bank and credit union I talk to say that you cannot use an FHA loan to buy a 4-unit building! I have specifically asked five banks and credit unions if it is possible to use an FHA loan on a 4-plex and each of them said no. Only one of them said it could even be used on a 3-plex...and they said that was a maybe.

Am I missing something? Are these loan officers simply wrong or is there some type of institutional requirements that are leading them to say no?

Any thoughts would be greatly appreciated!

We are in Johnson City, TN in case the state makes a difference.

Jeff Brower · Answer

I know this thread is 9 mos old now but I have to add something. @Tony Nguyen your comment is a bit misleading. If rents are $2500, then the PITI (plus MIP), must be less than (2500*0.75)= 1875 to qualify. And just because a property meets the self sufficiency test that does not absolve you from having to meet the minimum fha front and back end DTI ratios.

Paul Higbie · Answer

Jesse,

In order to use FHA financing to purchase a 4-plex the borrower must live in one of the units.  The other 3 can be rentals.  If the borrower is not going to live in one of the units then the only option for financing with 30 year money is conventional.

Paul.

Chris Mason · Answer

Hi Account Closed is right about the self sufficiency test sometimes being a deal-breaker. If you can swing 95% LTV, and you aren't over the income limit for the census tract (many tracts have NO income limit, so do check even if you make good money), there's a Freddie Mac solution that not a lot of people talk about.

The income limits are based on the 2010 census, which is great news because a lot of neighborhoods in 2017 are very different from 2010 (at least in Oakland and the Bay Area, idk about your area). I can guarantee you that window of opportunity will close up once the 2020 census is done.

Account Closed · Answer

Thank you both for your input! I'm going to specifically mention your points to lenders over the next week and see what they say.

I really appreciate your help.

Tony Nguyen · Answer

Account Closed  Just to add on top of what everyone else is already saying. With this method, you can use the "projected rental income" without proof of occupancy/renters to help you qualify (income-wise) as long as the rents meet the Self-Sufficiency Rule. The net self-sufficiency rental income 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 [1] the appraiser's estimate for vacancies and maintenance, or [2] 25% of fair market rent. So if rents turn out to be 2500 and your mortgage payment is 2500, that'll put you at a net 0. Which means your rents pay for the mortgage thus absolving you from having to have "income" to qualify for a property so you'd only need good credit and down payment funds and you can get into the property with as low as 3.5% down. Hope this helps.

David Dachtera · Answer

@Andrew Acuna and Account Closed,

Yes - FHA loan programs are intended for owner-occupied real estate, not investment property. If you live there ("house hack"), you should meet that requirement.

Andrew Acuna · Answer

Account Closed I know you already got it, but just to chime in. I did it, but they wanted me to live in it. Not sure why you had trouble--I was able to do it with the first lender...

Ryan Landis · Answer

Account Closed hopefully it worked out! As others have mentioned it is definitely doable. What I typically tell people that are set on a certain strategy (i.e. if you are only looking at 4 units and want to live in one) then find the lender that can make that happen. Just because the rules allow it to work, each lender will have their own loans that the are willing to actually do.

Jeff Dulla · Answer

Account Closed absolutely. You have a self sufficiency test you need to do but you definitely can.

One of my coworkers is from TN and does a lot down there. PM me if you want his info. At the very least he can give you all the info you seek without commitment.

FHA Loan on 4-Plex...Can't be done?

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