How to Finance a Duplex or Multifamily Home
Investing in a duplex or multifamily home can be a good way to generate consistent income, build-up long-term equity and, in many cases, even guarantee yourself a place to live for the foreseeable future.
But unless your investment portfolio is already booming or you’re just flush with extra cash, you’ll likely need to secure financing in order to purchase your chosen property.
How does this work with investment properties? Will it cost you more in time, money or hassle? It’s possible.
Duplex, Multifamily or Commercial Real Estate?
The first step to financing your investment property is to recognize what category it falls into. If you’re buying a duplex (a two-unit building, essentially) or a multifamily home (a three- or four-unit building), then you’ll have access to the same residential mortgage loans used for traditional single-family home purchases.
If the property you’re eyeing has more than four units, then that would fall into the commercial category. You’ll need to find a commercial lender, and you’ll likely have more stringent qualification and down payment standards to adhere to as well.
Will You Live There Too?
The second thing you’ll need to address is your stake in the property. Will you just be an investor and landlord, or will you also be a resident of the property as well? If you opt to live on the property, then you’ll qualify for owner-occupant mortgages, which often come with lower down payments and lower interest rates than those deemed for investors.
If you’ll simply be an investor, landlord or manager of the property, then you’ll need to stick with conventional financing. You will also have to put at least 20% down on your purchase — possibly more if you want to sure a lower rate.
Loan Options for Duplexes and Multifamily Homes
You have three options to choose from when financing a duplex or multifamily home purchase:
- An FHA loan (Federal Housing Administration)
- A VA loan (Veterans Affairs)
- A conventional loan
Remember, if you’re not occupying the property, the conventional loan is your only choice.
Here’s what to know about each option:
FHA Loans for Duplexes and Multifamily Homes
If you’re an owner-occupant, then you can use an FHA loan to purchase your multifamily home or duplex. These come with low interest rates, low down payment requirements (just 3.5% down, if you have good credit) and overall less stringent eligibility requirements. You can even secure an FHA loan with bad credit. The minimum score is just 500 if you can afford to put at least 10% down.
VA Loans for Duplexes and Multifamily Homes
Are you or your spouse a current or former member of a U.S. military branch? Then you could use a VA loan for your duplex or multifamily purchase — as long as you aim to live on the property. VA loans require no down payment, and they offer easier qualification standards and lower closing costs, too. They also don’t require private mortgage insurance or a minimum credit score.
Conventional Loans for Multifamily Homes and Duplexes
With conventional loans, the maximum loan amount depends on the size of the property. For a duplex, the limit is $620,200. For a triplex, it’s $749,650, and for a four-unit home, it’s $931,600. When applying, the lender will look at your credit score, income, debts, credit/payment history and other financial assets you might have.
Because investors present a higher risk for lenders — and they also don’t qualify for private mortgage insurance — you’ll need a down payment of at least 20% if you’re not living on the property. The higher your down payment is, the lower your monthly payment will be. It also may qualify you for lower interest rates, too, since the risk is lower for your lender.
You Can Use Your Rental Income to Help Qualify for Your Loan
If you’re worried your current income won’t qualify you for the high-balance loan you need for your multifamily home or duplex, then you might be able to use future rental income to help your case. Generally, in order to count this income on your application, you’ll have to have already signed leases in place, which indicate how much you’ll be paid and for how long.
The mortgage lender might also deduct 25% to account for any potential vacancies or maintenance costs that you might incur, so keep this in mind if you plan to use rental income to help qualify for your loan. Use a mortgage calculator to figure your monthly costs for the property.