Commercial Real Estate Purchase Using FHA Financing

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In this blog, we will cover and discuss commercial real estate purchase using FHA financing. In the following paragraphs, we will give you tips on commercial real estate purchase using FHA financing. How can investors qualify for commercial real estate purchase using FHA financing? FHA financing is generally used for residential purchases and refinances.

Residential Versus Commercial Real Estate

Residential Versus Commercial Real Estate

Residential real estate is defined as a type of property, containing either a single-family or multi-family (one to four units) structure, available for occupation for non-business purposes and for owner occupant primary homes only. FHA loans are the most popular mortgage loans in the United States and are known for their lax and low down payment mortgage loan programs. Most first-time home buyers and home buyers with lower credit scores, prior bad credit, prior bankruptcy, prior foreclosure, and higher debt to income ratios choose FHA loans. In this article, we will discuss and cover commercial real estate purchase using FHA loans on purchases.

About FHA Loans

FHA loans have lower mortgage interest rates than conventional mortgage rates since all FHA loans are insured by the federal government (HUD) against borrower default and loss due to foreclosure. FHA also has reduced it FHA annual mortgage insurance premium earlier this year from 1.35% to 0.85%. Now with the 0.85% annual FHA mortgage insurance premium, FHA’s mortgage insurance is extremely competitive with conventional private mortgage insurance.

Private Mortgage Insurance on Conventional Loans

Private Mortgage Insurance is not set at a fixed rate like FHA mortgage insurance premium. Mortgage Insurance Rates on Private Mortgage Insurance depends on the borrower’s credit scores and loan to value. If a conventional mortgage loan borrower has a 3% to 5% down payment home purchase conventional loan with credit scores under 680, then the chances are that their private mortgage insurance rate will be higher than 0.85%. FHA is a great residential mortgage loan program. Now homebuyers can utilize commercial real estate purchases using FHA loans.

Using FHA Loans For Commercial Real Estate Purchases

Using FHA Loans For Commercial Real Estate Purchases

There is however a little-known exception to FHA’s narrow interpretation of that definition that allows borrowers to purchase commercial/residential (mixed-use) piece of real estate. Borrowers can purchase commercial real estate purchase using FHA Financing for a 3.5% down payment home purchase instead of the 25% to 30% for a commercial loan. Yes. FHA will permit Commercial Real Estate Purchase Using FHA Financing on mixed-used properties using FHA 203k Rehab Loans.

Commercial Real Estate Purchase Using FHA Financing With FHA 203k Loans

A standard FHA insured mortgage loan (FHA 203B) will not allow a mixed-use commercial property as an approved property type to be eligible for FHA financing. Only FHA 203K (HUD’s renovation loan) will allow a purchase or refinance of a commercial/residential (mixed-use) property type. If a borrower would like to purchase or refinance a piece of property combining both commercial and residential units (mixed-use) using the FHA 203k, it is possible under strict property type guidelines.

FHA 203k Loan Eligibility on Commercial Real Estate

To become FHA 203k eligible, a mixed-use property must-have commercial portions (square footage) restricted to 25% for a four-story, 33% for a three-story and 49% for a two-story of the entire available floor area. An example would be in a two-story mixed-use property the residential space has to have the same square footage as the commercial space. The stairs would be considered part of the residential space. Of course, the borrower had to live on the property. It’s still an FHA loan and FHA only lends to owner-occupants. Most times these types of properties are purchased by business owners that want the commercial portion for their business and then live in the residential portion.

What Can You Use On Renovation Funds on FHA 203k Loans

What Can You Use On Renovation Funds on FHA 203k Loans

The renovation funds from the FHA 203k Loan can only be used for the residential portion of the property. You can use rental income for qualifying purposes. This means you can use future or existing rents on any additional units aside from the borrower’s unit as income. If the commercial space has a current tenant, this too can be used as income. If the commercial space is not occupied and no rent is being paid, no income can be added. This is a great opportunity for anyone looking to purchase a commercial property for 3.5% down.

Getting Started With Qualifying For FHA Loan For Commercial Real Estate Property

This article on Commercial Real Estate Purchase Using FHA Financing was written by Alex Carlucci. Alex is also known by real estate and mortgage industry professionals as the King of FHA 203k Loan due to his expertise in FHA 203k Rehab Loans. Alex Carlucci is an expert on FHA 203k Loans and teaches FHA 203k Loan Courses to licensed realtors. Real estate agents participating in Alexander Thomas Carlucci FHA 203k Loan Classes will get 3 hours of credit for their annual real estate CE requirements in the state of Illinois. If you have any questions on commercial real estate purchase using FHA Financing or any questions on FHA 203k Loans or are a licensed realtor and like to arrange a special FHA 203k Loan class for your company, please do not hesitate to contact us at GCA Mortgage Group at 262-716-8151 or text us for a faster response. Or email us at [email protected]