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What You Need To Know About FHA Commercial Loans?

When considering the purchase of a commercial property, exploring lending options becomes crucial. Opting for unconventional loan paths instead of the traditional route may be on your mind. The Federal Housing Administration (FHA) backs loans overseen by the Department of Housing and Urban Development (HUD), ensuring your lender is protected if you default on mortgage payments.

Wondering if it’s possible to acquire a commercial property using an FHA loan? The answer is yes in certain scenarios, contingent on factors like the property type, its use, and owner occupancy. This article delves into the eligibility criteria for FHA commercial loans, shedding light on when they’re allowed. 

Understanding FHA Commercial Property Loans

The Federal Housing Administration (FHA) backs mortgages for diverse commercial projects, promoting housing for low-income, elderly, and disabled individuals. Certain loans cater to both for-profit and nonprofit ventures, while others exclusively serve nonprofits. 

The FHA distinguishes a commercial property loan from its single-family home loan program, despite the deceptive naming. Let’s explore the fundamental distinctions between these offerings.

Multifamily Residential Loans

Many individuals view duplexes, triplexes, or 4plexes as multifamily dwellings, yet the FHA classifies them as single-family homes if the borrower commits to residing in the property for at least one year as their primary residence, without utilizing the program for evident investment purposes.

Mixed-use properties encompass spaces utilized for various purposes such as commercial, residential, retail, office, or parking. Essentially, the FHA has the capability to approve loans for commercially zoned buildings that are predominantly residential in nature.

For instance, an establishment with commercial space on the ground floor and apartments on the upper level could potentially qualify for an FHA commercial loan.

Multifamily Commercial Loans

The FHA offers a range of multifamily programs, which we’ll simplify as an FHA commercial loan. The key difference lies in owner occupancy and the number of units.

Qualifying for FHA Financing: When is a Commercial Property Eligible?

The FHA provides insurance for commercial loans covering three categories of multifamily residential units, catering to both for-profit and nonprofit entities.

  • Healthcare Facilities
  • Acquisition or Refinancing of Current Multifamily Rental Properties
  • Rental and Cooperative Housing Options

The FHA extends lending opportunities to nonprofit organizations dedicated to elderly housing (Section 202) and special needs housing (Section 811).

Exploring the FHA Rental Property Loan Program for Multifamily Properties

Section 207/223(f) loans, also known as multifamily housing mortgages, streamline the acquisition and refinancing of existing rental properties. Eligible properties must feature a minimum of five units with complete kitchen and bathroom facilities. 

These units should have been constructed or substantially renovated at least 3 years before applying for mortgage insurance and must not require major repairs. Essential building repairs are to be finalized before the closing, while non-essential repairs can be addressed post-closure. These loans are tailored for commercial rental properties, offering extended mortgage durations of up to 35 years and reduced interest rates made achievable by FHA mortgage insurance.

Please note that private mortgage originators, acting as lenders, must approve the loan. The FHA does not provide funds but offers mortgage insurance to mitigate the lender’s risks.

Key Takeaway: FHA Commercial Loans Have Important Considerations

While the FHA provides mortgage insurance for single-family homes, multifamily properties, and residential care facilities, it does not extend loans for purely commercial real estate acquisitions. 

Securing an FHA loan for commercial properties can pose complexities, especially for novice real estate investors. If you are new to real estate investment, consider exploring FHA loan options for owner-occupied multifamily residences as a more suitable starting point.

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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