5% Down on conventional loan on Multi-family offered?

29 Replies

Hi all! I've been reading a lot of forums on BP and saw many people say that 5% down conventional loans on a owner occupied fourplex is no longer existent. 3 out of 4 lenders I've reached out to also told me the same thing such that the lowest % down is 5% even if owner occupied for a multi-family. However, I spoke to one lender that said I was eligible for 5% down conventional loan OO fourplex because its still considered primary.

I'm feeling really uneasy about this and was hoping I can get some assistance! 3 lenders suggested I go to FHA route if I want little down but this ONE lender is saying I'm good for the conventional. Is this a red flag? I prefer a conventional loan on this fourplex but something isn't feeling right. Is the 5% conventional down on multifamily a rule across the board that all lenders need to follow or is it different for each lender? Please assist!

It would have to be a 4 unit or less and you would have to occupy one of the units.  5% down conventional is normally reserved for a buyer who will live in the property.

Thank you @Curt Davis ! I am planning to owner occupy 1 of the units. I just thought it was strange that 3 lenders said 5% down is not possible even if owner occupied for conventional loan on a 4plex and only 1 lender said they can offer that.

If I decide to go with the lender that is allowing 5% down on conventional, can anything go wrong here? 

Multifamily homes with up to four units are considered residential so you can buy them with mortgages like those used to buy single-family homes. In order to get 5 percent you have to occupy the property. More than 4 units are considered to be commercial and the financing for such is different. And having a lower down payment mean higher rate, higher closing cost, higher payments and lesser equity.

Owner occupied primary residence with middle FICO 721 you can go conventional or FHA 30 year fixed

FHA rate 2.75 APR 3.099 has 1.75 mortgage insurance for life of loan

Conventional 4.375 APR 4.498 has MI coverage until you get to 79.99% loan to value in time, or paying down

This is not commitment to lend. Rates change hourly. 

Conventional looks at the three rentals differently than FHA County loan limit applies.

Debt to income ratios different on FHA than Conventional as well

Originally posted by @Wayne Brooks :

@Aigo Pyles Wrong...conventional loans have Different down payment requirements for 2-4 units owner occupied as opposed to a SFR owner occupied.

*with mortgages like those through FHA loans. Usually, conventional loans for 2-4 unit owner occupied requires higher down payment compare to single unit. Single unit 3-5% DP, 2-unit (15%) and 3-4 units (25%). He can get that through 3.5% down for FHA loan, its his best option when buying 2-4 unit - to live in. Assuming that the amount to be borrowed is within the limit.

@Jacqueline Nguyen - I believe 5% down conventional for an owner occupied quad is possible under certain loan programs but qualifying can be challenging. The "Freddie Mac Home Possible loan program" allows 5% down conventional on 1-4 units BUT to qualify you have be under the income threshold for your area (this includes the property's rental income). On top of that, you still must qualify from a DTI standpoint (which includes both the rental income AND the new mortgage payment). So yes, it is possible, but it is a puzzle and the pieces have to fit together perfectly for it to work.

I had a similar issue. I've heard in the past that you can get a 5% down conventional on anything that is owner occupied 1-4 units. However just yesterday my lender told me that's not the case anymore. I know someone already posted one of these but here are the Freddie Mac/Fannie Mae eligibility matrices to show it.

https://singlefamily.fanniemae.com/media/20786/display
http://www.freddiemac.com/singlefamily/factsheets/sell/ltv_tltv.htm

If you're looking to purchase a small MFH with less than 15% down you need to go FHA, eventually refi into conventional (once you have the equity), and then utilize FHA again.

The truth is it is available if you specifically target freddie mac home possible program. It's a conventional loan program but a niche one within conventional lending. There are income limits that you need to be at or below to qualify for 5% down on 2-4 unit primary residence properties. Typically regular conventional programs through fannie or freddie are 15-25% down on 2-4 unit even when you occupy them as your primary residence.

Freddie HP just allows you access to these properties with lower down payment. Its a niche conventional program. Its advantages are that you can put low down and not have to deal with FHA self sufficiency rule (down side of FHA) and it has way less expensive mortgage insurance than FHA (1.75% upfront one time +.80 to .85% month for up to the life of the FHA loan).

The downside of Freddie HP is that you cant really use it in more expensive coastal markets because the price is too high and if there are income limits to qualify for freddie HP its going to be a game of chicken or the egg.

I ran into the same issue.  I was told by multiple lenders that they don’t offer a 5% option on 4plex.  Also, no one in my area offers a 203K loan.  So really it  comes down to the specific institution as to the product line they are pushing.  I ended up using a local credit union to get the financing that makes the most sense for me.

I am going through this right now. Just had an offer accepted fortunately. It's just for a two unit, but I have had 2 brokers and several lenders say that I needed 15% down for conventional. Fortunately, I found one without PMI, so I went with that.

@Jacqueline Nguyen Different lenders have different policies and depending on the ultimate source of the loan, that can be dictated by things like the Home Possible or FHA guidelines (as mentioned in this thread). Ultimately, it just comes down what level of risk the lender is willing to take.

Finding one lender that is willing to do 5% down and another that is not isn't inherently a red flag. Can I ask, is there a reason you would not want to use an FHA loan? Do you no longer qualify?

You can technically be qualified for both but most people are electing to go FHA bc they surpass the income requirements of the loan. FHA is more flexible and open to the largest amount of owner occupied buyers.

I wouldn't say there's red flags per se, just ask them why they think you're qualified while others say you aren't. Maybe this lender is forgetting to account for something others did etc. 

Thank you all for your help and input!

@Dave Spooner I wanted to go conventional route to avoid the upfront fees since I would eventually want to refi to conventional. Not knowing how the market would be, I was hoping to lock in on this low interest rate with conventional now in case it's higher in About 2 years when I refi.

@Jacqueline Nguyen I am two weeks out from closing on a duplex that I was originally going to do a 5% down conventional loan on. After I went under contract my loan officer was notified that his institution's rules were constantly changing due to COVID instability and they changed their requirement to 15% down for the multi-family. With that we found out I was still eligible for an FHA loan. If I had more time to shop around I might have been able to find a lender that still offered conventional multi-family financing at 5%.

Good on you for shopping around with multiple lenders as they all differ in what they are able and willing to offer. As long as you trust your Agent and you both trust the lender I would say you're in a good position.

Best of luck!

Alex

@Jacqueline Nguyen

I've included the Fannie Mae eligibility matrix where it shows the differences in down payments required by Fannie Mae for the number of units...  

https://singlefamily.fanniemae.com/media/20786/display

...and a fact sheet for Freddie Mac's Home Possible product.

https://sf.freddiemac.com/content/_assets/resources/pdf/fact-sheet/home_possible_factsheet.pdf

Home Possible has income restrictions, but not a bad way to go if you qualify.

Best of luck.  If you need a referral for either of those products, don't hesitate to ask.  We don't do them, but I can refer you to a good LO.

Stephanie

@Jacqueline Nguyen ,

You've gotten replies from people who know more about the details of loans than I do. However, I'll tell you this. Remember that loan officers get paid commission. There are such things as actual lending requirements stipulated by government agencies that dictate the rules of the programs, and then there are "overlays" which are basically extended guidelines that the lender has voluntarily chosen to fit their own business model.

Loan officers that work for lenders that have certain restrictive overlays will often imply or outright state (falsely) that their overlays are program requirements. If you believe that no other lender can give you a better deal, you'll stay with the current lender that you're talking to and they'll get their commission. Following this logic, loan officers will often say things like "we can't do it and everyone else will say the same" or "that's impossible, nobody is doing that anymore." Unless you have the actual government memorandum/pamphlet/law explicitly saying that nobody can do it, you should not take the loan officers at their word. If you call 4 loan officers from 4 different companies, it is not uncommon for them all to claim slightly different things are "possible."

This doesn't mean that they're always correct or incorrect. Right now a lot of programs have been temporarily modified due to the pandemic, and I've had loan officers who were honestly unaware of certain memorandums. As such, they tried to offer something that I knew that they couldn't actually follow through with. My point in saying all of this is that while you should confirm and ask questions, you should also understand that it is totally normal for different loan officers to tell you different things, and they will often claim that something is "impossible" when it is completely possible.

Originally posted by @Jacqueline Nguyen :

Thank you all for your help and input!

@Dave Spooner I wanted to go conventional route to avoid the upfront fees since I would eventually want to refi to conventional. Not knowing how the market would be, I was hoping to lock in on this low interest rate with conventional now in case it's higher in About 2 years when I refi.

If you want to avoid the upfront fee from FHA thats easy just structure the loan to have 1.75% credit and the Upfront MIP from FHA to be paid at closing since 1.75% credit - 1.75% UFMIP = a wash. Yes you have .50% or whatever higher rate but when you refinance into conventional later on you wont be stuck with that nearly 2 points of cost.

This will allow you to essentially have FHA + monthly MI only (no UFMIP).

Problem solved.