Financing Options for Purchasing a Multi-Unit Property as a First Home

Duplex with white trim and garage doors

Purchasing your first home can be scary.

For years, you’ve been told that homeownership is essential for financial success, but when it comes time to make the purchase, it can be easy to hesitate. Renting might seem like a waste of money to some, but committing yourself to hundreds of thousands of dollars in mortgage debt can be terrifying.

But what if there was a way for someone else to pay your rent? Sounds like a give-away, but purchasing a multi-unit property as your first home is a reality for many buyers.

Purchasing a multi-unit home as your first property has obvious upsides. You get to use the tenant’s rent checks as additional income, and this future income could actually be used to qualify for your purchase.

There are, of course, certain challenges to purchasing a multi-unit property as your first home. Mortgage products that allow for multi-unit properties have various requirements, but a reliable lender, along with a bit of personal research, can help you make the right decision for your specific needs.

The Purchase of a Duplex or Multi-Unit Property as Your First Home

Purchasing a Multi-unit Property as Owner-Occupied Home with FHA Loans and Conventional Loans

FHA loans are often one of the best ways to purchase a multi-unit property. The Federal Housing Administration will allow you to purchase a duplex or multi-unit home with as little as 3.5% down, and this can be used for properties up to four units. FHA loans also have a loan amount up to $831,000 for homes with two units.

For conventional options, there is a two-unit minimum of 15%, while three-unit homes have a minimum of 20% for the down payment, both of which carry the exception of Home Possible and HomeReady programs. Also, a four-unit property has a minimum of 20% with the same exceptions. There are also portfolio loan options for owner-occupied multi-unit properties.

FHA versus Conventional

Many people want to decide between an FHA loan or a conventional loan. Choosing the right one can make a profound difference on your long-term finances. An FHA loan will carry both up-front costs and a monthly mortgage insurance payment, which will stay for the life of the loan. However, it will have a lower interest rate compared to a conventional loan, which is a result of the mortgage insurance.

Conventional loans, on the other hand, will not carry up-front mortgage insurance but will have monthly mortgage insurance for at least two years or until the loan is at 78% owner equity.

Portfolio Loans for Multi-Unit Property

It’s also possible to use a portfolio loan to purchase a multi-unit property. These loans have different standards, and often have higher limits and lower down-payment requirements.

For two-units, you can have a loan up to $1.1 million with a minimum of 10% down. For three or four units, there is a maximum loan amount of $2.5 million, but these loan will require a minimum down payment of 15% at the time of the purchase.

Freddie Mac Home Possible

Purchasing a multi-unit property as a first home has many financial benefits.

Released in January of 2018, this is a conventional loan program that is designed for first-time homebuyers who want to purchase a home in an area that has been targeted for redevelopment. These areas are usually in or near major metropolitan cities. Qualification for this program allows the borrower to take out a loan with below-market interest, and they usually come with significantly-lower mortgage insurance compared to both FHA and conventional loans.

However, both the borrower and the property need to qualify under the guidelines of the program. The properties are specifically-selected homes in designated areas. To see which properties are available, you can visit the Home Possible website from Freddie Mac. You can also use this site to view the borrower eligibility restrictions.

The max amounts for multi-unit housing with Home Possible are:

• Two units: $580,150 with a minimum down-payment of 5%

• Three units: $701,250 with a minimum down-payment of 5%

• Four units: $871,450 with a minimum down-payment of 5%

Other Lending Options for Multi-Unit Properties

There are also options on multi-unit housing that may work for your needs. If you qualify, VA loans are available for duplexes and multi-unit housing, and they are often available with little to no down payments.

203(k) loans, which provide financing for the purchase as well as repairs, are also an option for borrowers looking for multi-unit homes. Be sure to speak with a knowledgeable lender who can show all the available financing options.

Disadvantages of Choosing a Multi-Unit Home

While purchasing a multi-unit home as your first property has obvious benefits, there are a few reasons that people may stay away from this type of investment. When you purchase a property like this, you are now a landlord; you’ll have to keep the home in rentable shape, find the right tenants for your budget, and be ready at a moment’s notice to make required repairs to the house. This is a hassle that many people don’t want to take on.

Being a landlord has its own set of challenges. You may be contacted by a tenant just before dinner, when you arrive at work, or even 4:00 in the morning, and the issue may be as insignificant as a broken light fixture. But they’re paying rent and expect a completely-livable house; it’s your responsibility to deal with their issues.

Even finding quality tenants can be a challenge. You’ll have to screen candidates while adhering to strict housing laws that combat discrimination. Even if you find a tenant, you may eventually be forced to evict a renter who is not paying rent or violating rules of the agreement, such as pets or general upkeep rules.

It’s not for everyone, but if you decide to purchase a multi-unit property as your first home, you’ll have the potential for an outstanding financial future.

Learn More About Mortgages for Multi-Unit Properties

Our team is ready to help you make the right decision. Contact us today and we’ll walk you through the financing options for multi-unit properties. 

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