May 10, 2017
A reader asked us a question this week in the comments section about FHA mortgages for properties with multiple units. “I want to buy a 6 residential unit apartment building with a very small store front commercial space on the property (computer repair shop that takes up about 15% of the property space) I plan on living in one of the apartment units. Is there an FHA loan out there for this situation?”
FHA mortgages under the single family loan program do allow FHA loans to qualified borrowers for multi-unit properties. The rules for these purchases are found in HUD 4000.1, which states:
“FHAs programs differ from one another primarily in terms of what types of Properties and financing are eligible. Except as otherwise stated in this SF Handbook, FHAs Single Family programs are limited to one- to four-family Properties that are owner-occupied Principal Residences. FHA insures Mortgages on Real Property secured by:
– detached or semi-detached dwellings
– Manufactured Housing
– townhouses or row houses
– individual units within FHA-approved Condominium Projects”
Later on in the rule book, we also learn:
“This section provides the basic underwriting standards for Single Family (one to four units) Mortgages insured under the National Housing Act. When underwriting a Mortgage, the Mortgagee must determine the Borrowers creditworthiness, capacity to repay, and available capital to support the Mortgage. The Mortgagee must also examine the Property to ensure it provides sufficient collateral for the Mortgage.”
Yes, FHA loan rules specifically limit a borrower to a property with a maximum of four units under the single family FHA loan program. So the short answer to this reader question is no, a six-unit purchase is not possible. HOWEVER, there is one exception.
FHA 203(k) rehab loans, which may be used to downsize an existing property to one that meets the one-to-four unit criteria. From HUD 4000.1 rules for FHA 203(k) rehab loans:
“Types of eligible improvements include, but are not limited to:
– converting a one-family Structure to a two-, three- or four-family Structure;
– decreasing an existing multi-unit Structure to a one- to four-family Structure;
– reconstructing a Structure that has been or will be demolished, provided the complete existing foundation system is not affected and will still be used;
– repairing, reconstructing or elevating an existing foundation where the Structure will not be demolished;
– purchasing an existing Structure on another site, moving it onto a new foundation and repairing/renovating it;
– making structural alterations such as the repair or replacement of structural damage, additions to the Structure, and finished attics and/or basements;
– rehabilitating, improving or constructing a garage;
– eliminating health and safety hazards that would violate HUDs Minimum Property Requirements (MPR);”
As you can see, a rehab loan could make all the difference, provided the borrower is willing to pay for the conversion. FHA mortgages used for purchase or refinance would otherwise be limited to a maximum of four units under the single family home loan program. Talk to a loan officer to learn what requirements exist for rehab project time frames, escrow, and related issues unique to a rehab loan.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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