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We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free - so that you can make financial decisions with confidence. Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover.
The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you.
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Financing a duplex or multifamily home can be a smart way to build wealth. Bankrate’s guide covers the differences in classification between duplexes, multifamily units and commercial properties, as well as the different types of financing associated with each.
The options for financing multifamily homes vary depending on whether the buyer intends to occupy one of the units. Owner-occupants can choose among FHA loans, Veterans Affairs loans or conventional financing. Investors, however, are limited to conventional mortgage loans only.
Here’s a look at four loan options for duplexes and multifamily properties.
Conventional mortgages are suitable for owner-occupants and investors. You can apply for a mortgage for a multifamily home from a bank, credit union or mortgage lender, just as you would for a single-family home. Conventional mortgages conform to underwriting guidelines established by the government-sponsored mortgage giants Fannie Mae and Freddie Mac. When you apply, the lender considers your credit score, credit history, income, assets and other debts.
These loans are backed by the government and can be used for properties with up to four units, if you plan to live in one of them. They work best for first-time homebuyers, those with lower credit scores or smaller down payments. They offer benefits like:
They are issued by FHA-approved banks and mortgage lenders, and the FHA guarantees a portion of loans, protecting the lender in case of default. Thanks to that guarantee, lenders are willing to offer more favorable terms, extend mortgages to borrowers with lower credit scores, and accept smaller down payments.
FHA loans are probably not right for you if you have excellent credit and enough money saved for at least a 10 to 15 percent down payment, because they can be more costly than conventional mortgages.
Qualifying for U.S. government-backed VA loans is one of the benefits associated with military service, and they can be used to finance properties with up to four units, not just single-family homes. VA loans are not intended for investment properties, so you can only finance a multi-unit property if the qualifying applicant plans to live in one of the units. VA loans are suitable for those serving in the military, veterans, and their spouses.
VA lenders are likely to give you more favorable terms than you’d otherwise get with a conventional mortgage, due to the VA guarantee on a portion of the loan.
There are plenty of advantages to taking out a VA mortgage if you qualify, including no down payment, financing up to 100 percent of the home’s price and no private mortgage insurance (PMI).
VA loans also save you money because they don’t require PMI. When you get a conventional mortgage while putting less than 20 percent down, you typically are required to pay for PMI. But VA loans don’t have this requirement.
Commercial loans are for businesses looking to build investment income or scale operations. As such, your lender wants to know your debt service coverage ratio, which is calculated by dividing your net operating income by the principal and interest of the loan requested. That figure enables the bank to determine your ability to repay the amount requested. You can receive commercial lending from banks or credit unions or with an SBA 7(a) loan.
Conforming loan limits for conventional loans are generally capped at $548,250 nationwide in 2021, with higher limits for counties with higher housing costs. If you’re buying a multifamily property, there are higher loan limits.
For most areas “other than Alaska, Hawaii, Guam, and the U.S. Virgin Islands,” according to the FHFA, the maximum loan limits are $702,000 for two-unit homes, $848,500 for three-unit homes and $1,054,500 for four-unit properties.
Buyers of a duplex or multi-unit home can sometimes use the projected rental income from the additional units to qualify for a loan. For those payments to be taken into account, the renters usually must have already signed a lease.
Lenders can consider rental income from the multifamily property as long as the prospective borrower can provide appropriate documentation of the payments.
According to Fannie Mae guidelines, the property must be either a two-, three- or four-unit residence that is owner-occupied, or a one- to four-unit investment property. That means if you’re going to live in one of the units, rent from the tenant-occupied units can help you qualify for a mortgage. If you’re an investor, you can count the rent from all units.
Not all the income applies though; typically, 25 percent is subtracted to account for vacancies and maintenance.
You’ll also need to provide documentation to show that the rental income is stable. Acceptable proof could be a current lease, an agreement to lease, or at least two years’ worth of consistent rent history. You may also need to provide IRS Form 1040 Schedule E to prove that the rent was reported on your tax return.
Traditional mortgages require a 20 percent down payment. Buyers can sometimes get mortgages with lower down payments, though they’ll have to pay for PMI.
If you’re buying property as an investment and don’t plan to live there, you’ll have to meet different criteria to get a mortgage. Investment properties don’t qualify for PMI, so you’ll have to put down at least 20 percent, and possibly more, to get traditional financing. Lenders generally assume more risk with investment properties, so they might require 25 or 30 percent down, depending on the interest rates on offer.
When learning how to buy a duplex or other multifamily unit, there are unique characteristics you will not encounter with a conventional mortgage. Appraisals might be rare to come by since there might not be as many comparable units in the area. So, if you use a multifamily conventional loan, you could end up having to shell out a higher down payment, upward of 15 percent for duplexes and 20 percent for multifamily homes (those with three or four units).
Bankrate.com is an independent, advertising-supported publisher and comparison service. Bankrate is compensated in exchange for featured placement of sponsored products and services, or your clicking on links posted on this website. This compensation may impact how, where and in what order products appear. Bankrate.com does not include all companies or all available products.
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