Multi-Family Residential Property Mortgage Loans

ByJohn Strange
Multi-Family Non-Occupant Co-Borrower Guidelines

In this blog, we will cover and discuss multi-family residential property mortgage loans in Illinois. Chicago and its surrounding suburbs have more than two-to-four-unit multi-family homes that are owner-occupant properties than any other area in the nation. HUD, the parent of FHA, allows 2 to 4 Unit Multi-Family Residential Property Mortgage Loans Illinois with 3.5% down.

HUD Occupancy Guidelines on Multi-Family Residential Property FHA Loans

However, it only applies to owner-occupant multi-family residential property homes. It cannot be second homes or investment properties. Many heard Chicago is the murder capital of the world. Martin Blank, a senior loan officer at Gustan Cho Associates and a part-time deputy sheriff said the following:

What is the safest suburb of Chicago? Located in the northwest region of Chicago, Edison Park is the safest neighborhood on this list – with a violent crime rate 77 percent lower than the average. The area is home to many of Chicago’s police officers and is very welcoming to families and young professionals.

Dale Elenteny, a senior loan officer at Gustan Cho Associates Group, Inc. and a lifetime Chicagoan is an expert in Chicago and the suburbs. Here is how Dale Elenteny Chicago and suburbs:

Home prices are expected to decline slightly over the next twelve months but the forecast for the third quarter of 2022 is still positive (11.4%). The median home sale price in the Chicago Metro Area in July 2022 was $325,000, up 4.8 percent from $310,000 in July 2021. The region is generally defined as the area south of I-55 and the Chicago Skyway. Many of the communities immediately near Chicago continue to have an urban character while many of the southernmost communities are suburban and exurban. What is the most affordable suburb of Chicago? Elk Grove Village is one of the cheapest places to live near Chicago and popular with families and commuters. The community offers housing below the Chicago metro average with good schools and outdoor recreation.

HUD Guidelines on Multi-Family Residential Property FHA Loans

Illinois home buyers can purchase 2-to-4-unit multi-family residential property homes with FHA loans. HUD allows owner-occupant home buyers to purchase 2 to 4 Unit Multi-Family Residential Property Mortgage Loans Illinois with a 3.5% down payment.

One of the units needs to be the primary home of the multi-family property owner. The remainder residential units can be rented out. In this article, we will discuss and cover the guidelines on 2 to 4-unit multi-family homes.

What Classifies Multi-Family Residential Property Under HUD Guidelines

Any residential multi-family residential property under HUD Guidelines is a two to four-unit property that is zoned residential with no commercial space. If a property has commercial space, it is classified as mix-use and it would not be eligible for FHA Loans.

FAQs on Multi-Family Residential Property Owner-Occupant Homes

In this section, we will cover the most popular FAQs on 2-To-4 Unit Mortgage Loans. A common question I get asked by multi-family residential property home buyers is if they need to be full-time occupants of the property. The answer to that question is a definite yes. HUD requires that the owner need to occupy the 2-to-4-unit property for at least a year.

Why You Should Buy a Multi-Family Residential Property Home First

Jose Morales, a senior loan officer at Gustan Cho Associates, Inc. answers the frequently asked question why you should buy a multifamily home first:

Multifamily homes are great for beginner investors because they can acquire a property with up to four separate units and start building home equity fast. A popular investment strategy many new investors take advantage of is living in one of their units while collecting rent on the others.

Can You Buy Another Primary Home And Rent Multi-Family Residential Property Home?

After one year, the owner of the multi-family property can qualify for another owner-occupant Conventional Loan. But cannot be a multi-family residential home. A multi-family residential homeowner can qualify for another owner-occupant home in one year. But needs to be a single-family home. A single-family homeowner cannot qualify for a multi-family residential property as a primary residence:

Can you use FHA for multifamily? Yes, you can qualify FHA Insured Loan Programs to buy multi-family residential property homes but it needs to be owner-occupant. FHA insures multifamily loans originated by FHA-approved lenders for the construction, substantial rehabilitation, and acquisition and refinancing of apartments and healthcare facilities.

Can You Use FHA For Multi-Family Residential Property Homes?

The mission of HUD, the parent of FHA, is to make housing affordable to all Americans with less-than-perfect credit, higher debt-to-income ratios, and low down payment. They are only available to owner-occupied residential units and not second homes or investment properties. Homebuyers who are intending on purchasing 2 to 4-unit multi-family residential homes and do not intend on living there and renting out all of the four units would not qualify for the FHA multifamily Loans.

Using Rental Income To Qualify Multi-Family Residential Property Homes?

The great news for two to four-unit home buyers is that they can live in one of the units and rent out the remaining units. HUD allows 85% of the potential rental income on the rental units to be used as qualified income when lenders calculate borrowers’ debt-to-income ratios. The potential rental income figure is provided by the home appraiser.

Can I Use an FHA Loan To Buy a Multi-Family Residential Property Home?

Home buyers of multi-unit properties who intend on living in one of the apartments and renting the other units out for at least a year. If homeowners intend to vacate the property and convert all of them as rental units, it is allowed.

HUD requires owners of multi-unit properties to live in one of the units for at least a one-year period. Circumstances change and HUD realizes that if the property vacates the multi-unit prior to the one year, that will be fine.

What Does FHA Consider Multi-Family Residential Property Homes?

The four-unit multi-family homeowner might decide to move out of the multi-family residential property due to needing more space. If that is the case, they can qualify for another owner-occupant conventional mortgage. Borrowers will not be in violation of the conditions of HUD if they need to move out of their multi-family residential property after they purchase due to them needing more space due to having a new baby on the way or other extenuating circumstances.

FHA Down Payment Requirements On Multi-Family Homes

Buying a multi-family home with only 3.5% down is a great way of being a homeowner and a property investor at the same time. The rental units on multi-family homes can be used to qualify for an income. For FHA loans, 85% of the market rents can be used for debt-to-income ratios income. For conventional loans, 75% of the potential rental income can be used to qualify as income toward the debt-to-income ratios. For conventional loans, a 15% down payment is required for an owner occupant two to four-unit multi-family loans

Borrowers of 2 to 4-unit multi-family properties require reserves of principal, interest, taxes, and income. Buyers of multi-family homes can contact us at 262-716-8151 or text us for faster response. Or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays.

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.

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