How to Get a Mortgage on a Multifamily Property

Michael Jensen, Mortgage and Finance Guru

Edited by Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

Updated December 11, 2022

Multifamily properties such as a duplex, three or four unit property represent an attractive opportunity for many home buyers.  Multifamily properties enable you to live in one unit and use the income generated by renting the other units to offset your housing expenses, such as your mortgage payment, property tax and homeowners insurance.  The rental income from a multifamily property can help you qualify for a mortgage and make owning a home more affordable.  Multifamily properties are also excellent for multi-generational families.  For example, you may want to live close to your parents but not with your parents.  In this situation, you can live in one unit and your parents can live in another unit and maybe even pay rent.

Multifamily properties offer significant benefits but also involve greater responsibility for the owner as compared to a single family home.  The added responsibilities of being a landlord and managing tenants can be time-consuming and expensive.  Additionally, in many cases the mortgage amount required to buy a multifamily property is higher than the loan required to buy a single unit home.  For example, a four unit property is usually more expensive than a single family home which means your loan amount is likely larger.  While rental income helps you afford a larger mortgage, you need to feel comfortable with the greater financial and personal commitment a multifamily property requires.

The qualification requirements for multifamily property mortgages are also different than for loans on single family homes.  As outlined in detail below, the qualification guidelines are moderately more challenging for multifamily mortgages as you are usually required to make a larger down payment, have a higher credit score and hold savings in reserve when you loan closes.  Please note that for most lenders, a multifamily property can have a maximum of four units.  Properties with more than four units require a different type of loan that is much more difficult to qualify for.  Additionally, as we highlight in the first point below, you are required to live in a multifamily property to qualify for the mortgage.  Lenders certainly offer non-owner occupied mortgages for rental and investment properties but these programs also apply more challenging qualification requirements.

Mortgages for multifamily properties are offered by traditional lenders such as banks, mortgage brokers and credit unions, usually through existing loan programs such as conventional, FHA, VA, HomeReady and Home Possible.  So read our expert tips below on how to get a mortgage on a multifamily property and then find lenders to determine the loan program that is right for you.  

Understand the Occupancy Requirement

Borrowers are required to occupy at least one unit in a multifamily property to qualify for an owner occupied mortgages.  This is an important point because owner occupied mortgages have more flexible qualification requirements and lower mortgage rates as compared to non-owner occupied mortgages for investment properties.  You may decide to move out of the home at some point in the future, but you are required to reside in the property when your loan closes.

Learn About Multifamily Mortgage Programs

Not all mortgage programs permit you to buy a multifamily property.  For example, the USDA Home Loan Program and many low down payment programs offered by banks only allow single family properties.  The positive news is that many mortgage programs allow multifamily properties with up to four units.  We highlight some of the more common multifamily loan programs below.  The programs are offered by participating lenders.  You can also click on a title to learn more about each program.

Conventional: This is an industry standard loan program offered by virtually all lenders.  Conventional mortgages tend to have lower interest rates.

HomeReady:  This is a type of conventional loan that is designed to help borrowers with low-to-medium incomes and moderate financial resources buy homes.  The qualification requires for the HomeReady Program are more flexible than a standard conventional mortgage.

Home Possible: This is another conventional mortgage program that targets borrowers with low-to-medium incomes and limited resources.  Home Possible offers more flexible qualification requirements for multifamily mortgages than other programs. 

FHA: This government-backed mortgage program enables you to buy a property with a low down payment and offers more lenient borrower qualification guidelines, including a lower required credit score.

VA: This program enables eligible military personnel and veterans to purchase a home with no down payment.  Qualification requirements for VA mortgages are stricter but VA mortgage rates are usually lower than other programs. 

We recommend that you contact multiple lenders in the table below to learn more about the multifamily mortgage programs they offer.

Know the Down Payment Required for a Multifamily Property

The down payment required to buy a multifamily property may be higher than for a single family home, depending on the mortgage program.  For example, a conventional loan on a single family property only requires a down payment of 3% while the down payment required for a two unit property is 15% and the down payment for a three or four unit property is 25%.  A higher down payment means applicants are required to come up with more money to buy the property.  As outlined below, the down payment requirement varies by loan program with the VA, FHA and Home Possible Programs requiring the lowest financial commitment from borrowers.  Be sure you understand the down payment required before you go property hunting and apply for a mortgage.

Conventional: 15% for two unit property and 25% for three or four unit property 

HomeReady: 15% for two unit property and 25% for three or four unit property. Borrowers are required to provide a 3% minimum personal financial contribution if the loan-to-value (LTV) ratio is greater than 80% and no contribution is required if the LTV ratio is less than 80% which means all of the funds for a down payment can come from a gift or grant.

Home Possible: 15% for a two-to-four unit property financed with a fixed rate mortgage.  If your mortgage amount is below the conforming loan limit, only a 5% down payment is required if you use an Affordable Second loan in addition to the first mortgage.  If your loan amount is above the conforming loan limit , a 15% down payment is required for a two unit property and 20% down payment is required for a three-to-four unit property and you cannot lower the required down payment by using an Affordable Second loan. 

FHA: 3.5% if all applicants reside in the property.  A down payment of 25% is required if a non-occupying co-borrower, like a parent, is also on the loan.

Minimum Credit Score for Multifamily Mortgage

As detailed below, the minimum credit score to qualify for a multifamily property mortgage may be higher than for a single unit property. Please note that the required credit score may vary depending on your LTV ratio and debt-to-income ratio. Borrowers with higher LTV and debt-to-income ratios are usually required to have a higher credit score.

Conventional:  640 - 700, depending on LTV ratio and debt-to-income ratio

HomeReady: 640 - 700, depending on LTV ratio and debt-to-income ratio

Home Possible: 700

FHA: 580 or as low as 500 if LTV ratio is less than or equal to 90%

VA: 620 (although lenders are supposed to review an applicant's total credit profile so lower scores may be allowed in some cases)

Debt-to-Income Ratio for a Multifamily Mortgage

Debt-to-income ratio represents the maximum amount of your monthly gross income that you can spend on debt payments including your mortgage, property tax and homeowners insurance as well as other monthly expenses such as credit cards, auto and student loans.  The higher the debt-to-income ratio applied by the lender, the higher the mortgage amount you can qualify for.  The maximum debt-to-income ratios for multifamily mortgage programs are below. 

Conventional: 45%

HomeReady: 43% - 50%

Home Possible: 43% - 45%

FHA: 43% - 50% depending on several factors including additional income sources and savings in reserve

VA: ~41% plus the VA Home Loan Program applies a residual income analysis to make sure you can afford your total monthly housing expense

Use our Mortgage Qualification Calculator to determine what size mortgage you can afford based on your monthly income and debt expense

How Rental Income is Factored into a Multifamily Loan Application

Lenders take a conservative approach to assess how much rental income you can include in your loan application which means you may not get full credit for the income produced by the property.

Lenders usually use the lower of 75% of: 1) current rents (if the units you do not intend to live in are already leased); or, 2) the expected income according to a rental appraisal. In both cases, lenders usually apply a 25% discount to current or projected rents, even if the property is already leased and generating income. Lenders discount the rental income to account for potential vacancy as well as unforeseen property expenses.

Borrowers can also verify rental income by providing lenders with a tax return for the most recent year that shows the income from the property on the Schedule E, although this only applies if you are refinancing and is not possible with purchase mortgages.

We should highlight that if you have less than a year of experience receiving rental income or managing properties, you can only include rental income less than or equal to the total monthly housing expense -- which includes the loan payment, property tax, homeowners insurance and homeowners association (HOA) dues (if applicable) -- for the property in your mortgage application.

For example, if the property is projected to generate $6,000 in monthly rental income and the total monthly housing expense is $5,000, the lender only adds $5,000 to your personal income to determine the mortgage you qualify for, even though the actual rental income is higher.

If you have at least one year of experience receiving rental income or in property management, there is no limit to the rental income that can be included in your application.

Please note that if you do not currently own or rent a home, you cannot use rental income from the units you do not intend to occupy to qualify for the mortgage.

You should understand the method lenders use to calculate rental income from a multifamily property as this can significantly impact your ability to qualify for the loan.

Landlord Experience is a Plus

As referenced above, many multifamily mortgage programs including the VA and FHA programs require that borrowers have prior landlord or property management experience for the full amount of rental income to be included in your loan application.

This is another very important point because most multifamily borrowers rely on rental income from the property to qualify for the mortgage.  Be sure to check with your lender to understand their prior landlord experience requirement before you apply for the loan.

You can use the FREEandCLEAR Lender Directory to find lenders that offer multifamily mortgages.

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Reserve Requirement for a Multifamily Property

Because multifamily properties involve more risk than single family homes, lenders require that borrowers hold savings in reserve at the time your loan closes.  The reserves are supposed to help homeowners handle any financial challenges they face such as a tenant skipping a rent payment.   

The reserve requirement is based on total monthly housing expense which includes your mortgage payment, property taxes, homeowners insurance and other applicable costs including mortgage insurance and homeowners association (HOA) dues. For example, if a program requires three months of reserves and your total monthly housing expense is $2,500, then you are required to hold $7,500 ($2,500 * 3 months) as savings in reserve when your mortgage closes.

Please note that the reserve requirement does not continue after your loan closes but we recommend that borrowers keep three-to-six months of total housing expense in reserve. We outline the reserve requirements for multifamily mortgage programs below.

Conventional: Up to 6 months depending on LTV ratio, credit score and debt-to-income ratio

HomeReady: Up to 6 months depending on LTV ratio, credit score and debt-to-income ratio

Home Possible: 2 months

FHA: no reserves required for a two unit property; 3 months for a three or four unit property

VA: 6 months

Multifamily Loan Limits

Multifamily programs apply loan limits that cap your maximum mortgage amount.  The good news is that the more units in a property, the higher the loan limit.  Loan limits vary by program and county, with more expensive areas having higher limits.  Below are the loan limits for each mortgage program for the contiguous U.S. and Puerto Rico.  The loan limits are higher in Alaska, Hawaii, Guam and the U.S. Virgin Islands. Click on a program title to use a loan limit calculator to determine the maximum mortgage amount in your county.

Conventional: conforming loan limits ($929,850 - $1,394,775 (two units) / $1,123,900 - $1,685,850 (three units) / $1,396,800 - $2,095,200 (four units))

HomeReady: conforming loan limits

Home Possible: conforming loan limits

FHA: $604,400 - $1,394,775 (two units) / $730,525 - $1,685,850 (three units) / $907,900- $2,095,200 (four units)

VA: As of January 1, 2020, the VA home loan program does not apply loan limits if you have your full VA entitlement available.

Mortgage Terms for Multifamily Loans

The interest rate for a multifamily mortgage is usually higher than the rate for a single family home which makes comparing multiple quotes even more important.  We advise borrowers to shop at least five lenders to find the loan with the lowest mortgage rate and closing costs.

Additionally, when you request proposals from lenders be sure to understand their application process as qualification guidelines vary, especially for multifamily mortgages. You can use our free personalized mortgage quote form to compare loan terms for leading lenders.

Sources

"Standard Eligibility Requirements: 2-4 Units."  Eligibility Matrix.  Fannie Mae, October 2 2019.  Web.

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