Whether you are looking for a home for a family member or want to create a new income stream by becoming a landlord, a multiunit residential property may be just what you need.
Multiunit properties with two to four units may be financed using the same mortgage programs you would use to purchase a single-family home. Anything larger would be considered a commercial property.
It’s important to be aware that, if you are planning on renting out one or more of the units, you, the buyer, must live in one of them as your primary residence. Unless you do, you would have what lenders would consider an investment property, and you would be unable to finance it using traditional residential financing.
If you are looking for conventional financing, meaning a Fannie Mae loan, and you are planning on taking out a fixed rate mortgage, plan on a 15% to 25% down payment, depending on the number of units. With FHA you can put down as little as 3.5% for a two-unit property, and as much as 5% on one with three or four units.
In purchasing a multiunit property, Fannie Mae differs from FHA when it comes to using rental income to qualify. With Fannie, future rental income (as established by an appraiser as fair market value for the area) can be used to qualify for a mortgage; however, for an FHA mortgage, you’ll need two years of proof of landlord experience if you want to use some rental income to qualify.
In any case, you’ll only be able to claim 75% of it as income, as there is what is called an occupancy rate in place.
Financing a residential multiunit property can be challenging. Involve your mortgage professional at the beginning of the process; he or she can help you select the financing option that’s right for you.