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How To Purchase a Multi-Family Home With An FHA Loan

Considering purchasing a home with multiple units to reside in one and rent out the rest for additional income? Exploring FHA multifamily loans might come to mind. While they can be advantageous in specific scenarios, if you are only planning to rent out a few units, they may not be necessary.

We will delve into all the essential information for those interested in renting out other units while living on the property. Let’s kick off by shedding light on what FHA signifies in the realm of multifamily loans.

Understanding FHA Multifamily Loans

An FHA multifamily loan offers borrowers and real estate investors the opportunity to acquire a multifamily property with 5 units or more, as defined by the FHA and mortgage investors. Properties with up to 4 units fall under single-family housing and do not qualify for this loan type.

Under the traditional FHA mortgage program, clients can purchase properties with up to 4 units. This setup provides advantages such as favorable terms including low down payments and potentially lower interest rates compared to typical multifamily loans. Furthermore, the criteria for income, credit, and debt-to-income ratio (DTI) are less stringent than many other loan alternatives.

Whether you seek an owner-occupied property or a larger apartment complex, here’s a concise overview.


Established in 1965, the FHA became an integral part of the U.S. housing strategy under the Department of Housing and Urban Development (HUD), aiming to broaden homeownership opportunities. The FHA’s core mission is to facilitate access to housing for individuals with lower incomes or a history of credit challenges, allowing them to engage more fully in the housing market.

While the FHA does not directly provide home loans, it functions by insuring these loans. This approach reduces the risk for lenders, enabling them to offer loans with more confidence, even in scenarios where borrowers may default.

Commercial Investor

If you are a commercial investor, the owner-occupied program is not suitable for your needs. The FHA offers commercial loan programs that may align better with your financing requirements. 

According to the FHA, a non-owner-occupied multi family home comprises 5 or more units, each equipped with full kitchens and bathrooms. To qualify for FHA insurance, the property must have been constructed or undergone a significant renovation at least 3 years before an application is submitted. Entities seeking this financing option can be either for-profit or nonprofit organizations.

How does an FHA multifamily loan for owner-occupied properties operate?

When applying for an owner-occupied multifamily home with up to 4 units, the process shares similarities with applying for a single-unit home. Qualification criteria include your credit score, income, debts, and property appraisal. However, there are two key differences to consider when dealing with multifamily properties.

Firstly, rental income plays a crucial role in the qualification process, reflecting the intention of generating rental revenue from the extra units. Secondly, as purchasing additional units requires more investment, loan limits increase with each additional unit added to the property.

FHA Loan Requirements: What Do They Entail?

As many seeking to reside in a home and lease out the remaining space may not necessitate a multifamily residence, a multiunit single-family home is often the preferred choice. Let’s delve into the specific criteria.


When seeking a mortgage, lenders review your income using documents like W-2s, 1099s, and tax returns. If you rely on rental income, a special appraisal known as a 1025 is conducted. This appraisal not only assesses the property’s value but also assigns a fair market rental value to its units.

For properties with three or four units, the rental income must cover the monthly mortgage payment (including principal, interest, taxes, and insurance) after a 25% deduction for maintenance or potential vacancies.

Credit Score

To be eligible for an FHA loan, a minimum FICO® credit score of 580 is required. The higher your credit score, the more favorable rates you can access. It’s important to note that lenders not only consider your credit score but also your credit history. For instance, if you’ve faced a foreclosure, a waiting period of 3 years is necessary before you can apply for a new FHA loan.

Debt-To-Income Ratio

Your DTI ratio indicates the portion of your pre-tax income allocated to debt payments each month. There are two DTI types: front-end and back-end.

Front-end DTI, known as the housing expense ratio, evaluates the share of your monthly income dedicated solely to your mortgage payment (comprising principal, interest, taxes, and insurance). On the other hand, the back-end ratio considers your mortgage payment along with all other outstanding debts like car loans, student loans, and minimum credit card payments.

To meet the criteria with a median FICO® Score ranging from 580 to 620, your housing expense ratio should not exceed 38%, and your total DTI must stay at 45% or below. For a FICO® Score of 620 or higher, FHA systems can green-light you with a back-end DTI of up to 67%, though this is subject to additional qualifying factors.


Appraisals have dual purposes: determining a home’s value and ensuring its safety for habitation. The valuation aspect is crucial as lenders are bound by the home’s worth for loan limits. This precaution is in place to protect against mortgage default scenarios, where the lender can seize and resell the property if payments are missed.

Compared to other mortgage investors, the FHA imposes specific safety regulations. Notably, properties constructed pre-1978 with chipped or peeling paint must undergo scraping and repainting before closing due to potential lead paint hazards.

Owner Occupied

Multiunit single-family homes financed with FHA loans require at least one unit to be owner-occupied. An FHA loan cannot be solely used for acquiring an investment property.

Which FHA Loans Exist for Renovation Projects?

Loans for renovation are accessible through the FHA 203(k) rehab loan program. This unique program enables you to include renovation expenses in a refinance or purchase. The property’s evaluation is based on its post-renovation value.

This initiative allows for comprehensive property remodeling while preserving the original home foundation. It offers flexibility for various renovation scales. The sole condition is that the renovation costs must be no less than $5,000. Additionally, a streamlined 203(k) loan option exists, requiring less documentation and allowing repairs of up to $35,000.

Exploring Alternative Financing Options for a Multifamily Property

While FHA multifamily loans present a viable option, they are just one among several alternatives. Let’s explore some other choices.

Conventional Mortgage

You can finance single-family multiunit homes up to 4 units and multifamily properties with 5 units or more using conventional mortgages. These properties can serve as primary residences with rented out units or as investment properties without owner occupancy.

It’s important to consider that down payments typically range from 15% to 30%, varying based on the number of units and loan purpose. However, the interest rates and mortgage insurance terms offered may be more favorable compared to FHA loans.

Commercial Mortgage

A commercial mortgage pertains to a business rather than a residential property, posing higher risk for lenders as the initial payment may involve your primary residence. Consequently, interest rates tend to be elevated in comparison to residential loans.

Repayment capability for a commercial mortgage hinges on your business’s performance. For instance, in the retail sector, lenders may assess foot traffic in the vicinity alongside your business’s income.

FHA Multifamily Loans: The Advantages and Disadvantages

Explore the advantages and disadvantages of FHA owner-occupied multifamily loans in a concise overview.



3.5% down payment

Owner-occupied Requirement

Low interest rates are prevalent due to lenders depending on the FHA’s mortgage guarantees.

Mortgage insurance premiums (MIP) are mandatory upfront and monthly payments for 11 years, independent of achieving over 20% equity in your home. If your initial down payment or equity at mortgage closing is below 10%, MIP payments continue throughout the loan’s duration.

Streamlined underwriting processes, with the option for manual underwriting to assess your individual circumstances.

Stricter FHA appraisals pose a challenge for approval, leading home sellers to hesitate accepting offers based on FHA preapprovals.

Consolidate renovation loan into the mortgage for a single, seamless payment process.

Interest rates are currently low, yet they could reach even lower levels if credit underwriting standards were more stringent.

FAQs For FHA Multifamily Loan

What is a multifamily property according to the FHA?

The FHA’s definition of multifamily properties includes those with 5 units or more. While many opt for single-family properties with 4 units or fewer instead of larger apartment complexes, there are some overlapping requirements. Whether purchasing a single-family or multifamily property, it must be residential and meet FHA appraisal standards either at purchase or post-renovation. A key distinction is that for single-family properties, at least one unit must be owner-occupied.

How do I apply for a multifamily loan?

When seeking an FHA loan for a 4-unit owner-occupied multifamily home, lenders will review your credit, income, and assets. Prepare documents like W-2s, tax returns, and 1099s. Don’t forget to include statements from bank and investment accounts for mortgage qualification.

Besides your financial status, the property will undergo appraisal for its value. You’ll also get a fair market rental value assessment to aid in qualifying for the mortgage through rental income.

Are there commercial FHA loans?

The FHA does not provide commercial loans. Instead, it allows for mixed-use properties as long as at least 51% of the space is designated for living, both for you and your tenants. This rule applies to single-family as well as what the FHA defines as multifamily residential properties.

Is an FHA multifamily loan the only way to finance a multifamily property?

When financing a multifamily property, you have a few options. One choice is a conventional mortgage, suitable for single-family multiunit homes up to 4 units or larger multifamily properties. Alternatively, a commercial mortgage, linked to a business rather than residential purposes, is influenced by the business’s performance.

Key Takeaway: Utilizing an FHA Multifamily Loan to Expand Your Real Estate Portfolio

Investing in owner-occupied multifamily properties with FHA loans offers a cost-effective entry into real estate ownership, allowing you to benefit from a steady stream of rental income. When you’re prepared to venture into property ownership, kickstart the mortgage process today. For further assistance, feel free to reach out to us at 719.247.6622

Picture of Reed Letson

Reed Letson

Reed offers two decades of expertise as a mortgage broker, focusing on veterans and first-time home buyers. With a strong grasp of real estate and mortgage markets, he empowers clients with practical insights. Reed's passion is guiding clients to build wealth through real estate investments and financing solutions.

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