2 To 4 Unit Property Home Purchase Mortgage Guidelines
This BLOG On 2 To 4 Unit Property Home Purchase Mortgage Guidelines Was UPDATED On April 30th, 2019
Any property up to 4 units is considered a residential property. It is a residential property as long as the home buyer intends in living in one of the units as an owner occupant.
- Both FHA and conventional loan programs have loan programs for 2 to 4 unit property mortgage loans
- Home buyers eyeing in purchasing a 2 to 4 unit property as their primary residence can capitalize in earning rental income
- Some, if structured the right way, can have their renters pay most, if not all, of their housing payments
Types Of 2 To 4 Unit Property Home Purchase
There are different types and styles of 2 to 4 unit properties.
- To be classified as a legal 2 to 4 unit property, the property needs to be zoned as a multi-unit residential property
- Each unit is an apartment with separate entrance, bedrooms, family room, kitchen, bathroom, and utility meters
- Some units are extremely nice and are condo quality
- Some 2 to 4 unit properties have laundry area for the tenants to share
- Or they can have individual private washers and dryers in the individual units
- FHA, VA, and Fannie Mae all have 2 to 4 unit property mortgage loans for owner occupants
- The potential rental incomes of the rental units can be used as income to qualify for the 2 to 4 unit borrower for debt to income ratio qualification
- Properties that have more than 4 units is classified as commercial property and do not qualify for residential FHA, VA, and conventional mortgage loan programs
How Can I Qualify For 2 To 4 Unit Property Home Purchase?
For FHA borrowers, the qualification requirements to finance a 2 to 4 unit property is that the mortgage loan applicant has a minimum of a 580 credit score.
- The minimum down payment required is 3.5%
- 85% of the potential rental income can be used as income and can be used in debt to income ratio qualifications
- For example, if the 2 to 4 unit property potential rental income is $1,000 per unit, 85% of the $1,000, or $850 per unit can be used as income
- There are some mortgage lenders who will not count potential rental income if the home buyer has not had property management experience for at least two years
- If this is the case where buyers are purchasing a 2 to 4 unit property and do not have documented property management experience, then go to a different lender where they do not have this overlay
Reserves On 2 To 4 Unit Property Home Purchase
For a two-unit property, there will be no reserve requirement.
- However, a mortgage lender may require you to have 3 to 6 months reserve requirements when you are purchasing a 3 to 4 unit property
- Reserves are one month’s principal, interest, taxes, and insurance payments
- Down payments for FHA loans can be 100% gifted by a relative and/or family member
- However, reserves cannot be gifted and the home buyer needs to prove that they have reserves in their bank account that has been seasoned for at least 60 days
Conventional Loan For 2 To 4 Unit Property Home Purchase
Conventional loans have larger down payment requirements for 2 to 4 unit properties.
- Unlike FHA 3.5% down payment requirement, conventional loans require 15% down payment on 2 to 4 unit property mortgage loans
- Mortgage rates for 2 to 4 unit properties are slightly higher than single-family home mortgage rates
Pros And Cons In Owning 2 To 4 Unit Property Home Purchase
A major plus in being a 2 to 4 unit property owner is that owners can have part or all of the mortgage payments and expenses paid for by tenants and live mortgage free or even get positive cash flow.
- 2 to 4 unit property owners who purchase their 2 to 4 unit property as an owner occupant primary residence property can eventually rent out their owner occupant unit and purchase another owner-occupant occupied primary single family home
- Home Buyers cannot purchase another 2 to 4 unit property if they already have a 2 to 4 unit property as an owner occupant home
- Buyers can purchase another home that is a single family home, townhome, or condominium as an owner occupant home
- The second 2 to 4 unit property can be bought as an investment home unless you get a job transfer that is beyond commuting distance
The disadvantage of owning a 2 to 4 unit property is the duties owners will inherit as being a landlord.
- Owners need to make sure you screen the right tenants, tend to the repair needs of tenants such as the following:
- fixing plumbing issues
- electrical issues
- HVAC issues
- repairing and replacing appliances that do not work
Major headaches and issues that come along with being a landlord are the following:
- Non-paying tenants
- Evicting tenants, tenants that are rowdy
- Re-renting the apartment when a tenant moves out
- Evicting tenants is a process and can take months going through the legal channel
- Can cost homeowners thousands in legal costs as well as a loss of rent, not to mention the stress.
Repairs can cost as little as a few hundred dollars to thousands. Owners should plan on having reserves if they intend to be a 2 to 4 unit property owner. If a heating and air conditioning system goes bad on one of the units, it can cost over $2,000 or more.