Buying Multiple Houses with a HUD/FHA Loan
By Terry Painter/Mortgage Banker, Author of The Encyclopedia of Commercial Real Estate Advice – Wiley Publishers, Member of the By Terry Painter/Mortgage Forbes Business Council
Buying multiple houses with a HUD/FHA loan for the purpose of renting them is not allowed. An FHA residential loan can be used to purchase a duplex, triplex or fourplex and renting units out is allowed as long as the applicant occupies one of the units. HUD multifamily will not finance 1 – 3-unit properties in any configuration. However, HUD will finance 2 or more contiguous fourplexes on one or individual tax lots.
Buying Multiple Houses with a HUD/FHA Residential Loan
How FHA Defines Residential Buildings
Click on this link for The Difference Between FHA and HUD. HUD/FHA defines residential as 1 – 4 units in one building on one tax lot. While you can apply for as many FHA residential loans in your lifetime as your primary residence as you want, you can only apply for one at a time, and you must occupy that home. Exceptions are made for divorce, job relocation, and if your family has gotten too large to fit in your current home. And FHA has strict rules against buying a home as a rental property.
Can you get away with this without FHA finding out? Not likely! This is because you will need to get rental property casualty insurance, and because FHA will be listed as co-insured and given a copy of the policy, they will find out you have renters. Of course, you can try and fool them by saying you are living in the home, but then if there is a major casualty, your insurance won’t likely cover the damage if renters were living there at the time.
Buying Muli-Unit Properties with an FHA Residential Loan
Good News! There is a loophole in the FHA rule of not allowing the purchase of an investment property with FHA residential financing. And that’s if you buy a 2 – 4-unit property and live in one of the units. That allows you to qualify for the owner occupancy requirement. And then Wala! You can rent the other units out. If you want to own a property with 5 units or more with HUD/FHA financing (see the next section) – you will need to apply for a HUD Multifamily Loan which is through a separate division of HUD.
Self-Sufficiency Requirement
Note that when buying 2 – 4 units, you will not be allowed to rent the non-owner-occupied units on Airbnb. They must be rented by the month. FHA will require you to submit monthly or longer rental agreements. To qualify for a FHA loan on multiple 2 – 4 unit properties you need to pass what’s called the self-sufficiency requirement. This simply states that you need to qualify on the mortgage for the portion of the property you occupy. So, if you are buying a fourplex, your personal income must qualify for 25% of the mortgage. Then you can use 75% of the net rental income after expenses to qualify for the balance. FHA mandates that all rental units are occupied at the time you apply for the loan.
Buying Multiple Homes with a HUD Multifamily Loan
Only Multiple Fourplexes Will Qualify
HUD Multifamily Loans must be 5 units or more and preferably be on one tax lot zoned commercial. The multifamily division of HUD does not make residential loans, and will not lend on 1 – 3 unit buildings in any formation period. Often, we have loan requests for someone who wants a HUD multifamily loan for 10 or more contiguous duplexes on one or individual tax lots. HUD just doesn’t want to do this.
On the other hand, HUD is okay with multiple fourplexes. Why they like fourplexes and not duplexes or triplexes, I do not know. Buildings must be contiguous and can be on just one, or individual tax lots. Check out these links to view the Advantages of HUD Multifamily Loans, and Disadvantages of HUD Multifamily Loans.
And here’s a HUD Multifamily Loan Glossary with 74 terms defined for a fast look up.
If you are interested in this, check out the HUD 223(f) Loan for acquisition, refinance and lite rehabilitation of existing apartment buildings. The Minimum Loan Amount for the 223f is $3 million, and there is really not a maximum loan amount. Click on these links to view today’s HUD Multifamily Loan Rates, Fannie Mae Multifamily Loan Rates, and Freddie Mac Multifamily Loan Rates.