FHA multifamily loans are used to assist in the purchase of multifamily real estate and offered by eligible loan providers. The Federal Housing Administration (FHA) provides insurance for these loans, which are subject to certain criteria defined by the FHA.
Since these loans are backed by the government, they’re more accessible and typically offer more favorable rates and terms in comparison to traditional mortgage loans. It’s worth noting that these loans differ from other FHA mortgage products and will require tracking down an eligible loan provider.
Key takeaways
- FHA multifamily loans are government-backed and can have more rigorous qualification standards than other traditional mortgage loans provided by a bank.
- These loans are applicable to properties with multiple units and can help provide funding opportunities to new real estate investors.
- Favorable interest rates are applicable, along with flexible loan amounts and terms of up to 35 years.
Who an FHA Multifamily Loan Is Right For
FHA multifamily loans can be utilized by a variety of borrowers, and can provide financing opportunities to those looking to:
- Acquire a real estate investment property: Whether you have an existing real estate portfolio or are a new borrower, an FHA multifamily loan can help support your real estate investment goals by helping fund the purchase of a multifamily property.
- Partake in a real estate construction project: If you’re looking to finance a construction project, an FHA loan can provide funds to facilitate the project if it meets certain eligibility criteria.
- Refinance an existing multifamily property: If you have a property within your existing real estate portfolio that you’re looking to refinance, an FHA multifamily loan can help.
How FHA Multifamily Loans Work
These loans are only insured by the FHA and provided by approved lenders who offer multifamily financing. Types of FHA multifamily loans include programs for acquisition, construction, and refinancing depending on the lender. In comparison to commercial real estate (CRE) loan rates, FHA multifamily loans are government-backed and therefore have favorable rates and terms that are affordable and accessible to buyers wanting to make a real estate investment.
To clarify; real estate investors aren’t able to purchase a multifamily building with an FHA loan if the property has five or more units. Usually, they are subject to an owner-occupancy requirement because it’s not considered a commercial loan. However, the United States Department of Housing and Urban Development (HUD), allows mortgage loans to be insured by the FHA for some for-profit and nonprofit multifamily buildings.
The FHA has various requirements to obtain a multifamily loan, including a rigorous appraisal process, using an appraiser approved by the FHA. Certain conditions will need to be met, such as:
- The property must have at least five units with completed kitchens and baths
- Completed or substantially rehabilitated for at least three years before the date of the application for mortgage insurance
- Noncritical repairs must be completed within 12 months of loan closing
- Projects requiring substantial rehabilitation aren’t eligible, and may not involve the replacement of more than one major system
- The remaining economic life of the project must be long enough for a 10-year mortgage
- The mortgage term can’t surpass 35 years, or 75% of the estimated life of the physical improvements
FHA multifamily loans also apply to certain healthcare facilities, disability housing, and senior housing.
You can visit HUD’s website to learn more about applicable FHA multifamily loan programs such as Sections 207/233F for construction and rehabilitation projects, and Section 202 which supports housing for the elderly.
Rates & Terms of FHA Multifamily Loans
Standard FHA Multifamily Loan | |
|---|---|
Interest Rates | Starts at generally 5.5%, varies per lender |
Loan Amount | Depends on property type/number of units |
Collateral | Property acquired serves as collateral |
Repayment Period | Up to 35 years |
Downpayment | As little as 3.5% |
Disbursement Timeline | Up to 6 months |
Qualifying for FHA Multifamily Loans
When qualifying for an FHA multifamily loan, application requirements will vary by lender. Similar to getting a small business loan, there are some common factors taken into consideration when determining your eligibility:
- Credit score: Like any loan, lenders will factor in credit scores to determine the overall creditworthiness of you and your business. Lenders want to make sure you’re a responsible borrower with a strong payment history. A score of 580 and above is recommended.
- Business finances: You’ll need to supply financial documentation of your business, such as cash flow statements, tax returns, balance sheets, profit and loss (P&L) statements, among other documents if requested by the lender.
- Personal finances: Lenders will take into consideration your personal income and require documentation such as tax returns and net worth statements.
- Number of units: Depending on the FHA program, the property being financed may be subject to varying requirements pertaining to the number of units in the building.
- Debt service coverage ratio (DSCR): The FHA typically requires a minimum DSCR of 1.18x (specific to market-rate properties).
- Property condition: Since the loan will be backed by the government, certain standards as to the property condition will be subject to appraisal. The FHA has safety regulation criteria that are more strict than a standard mortgage.
Where To Get an FHA Multifamily Loan
There are eligible lenders nationwide that offer various types of FHA multifamily loans. A good resource to begin your search and find a lender is via the FHA-approved lender online directory provided by the HUD.
Pros & Cons of FHA Multifamily Loans
| PROS | CONS |
|---|---|
| Favorable rates and terms due to being government-backed | FHA has strict compliance and eligibility requirements |
| Can assist with various opportunities, such as acquisition, construction, and refinancing | The closing timeline can be lengthy; usually up to 6 months |
| Easier to qualify for and accessible to businesses with low credit | It can be a challenge to find an eligible loan provider |
Alternatives to FHA Multifamily Loans
In the instance you perhaps don’t qualify for an FHA multifamily loan or want to explore further options, there are a few alternatives that may suit your business needs. These include:
- Bank balance sheet loans: Also known as portfolio loans, balance sheet loans are applicable to borrowers who already have a portfolio and have plentiful experience with real estate investments. These loans offer flexibility in both terms and building conditions and are eligible for multifamily property of five or more units.
- Short-term loans: If you need funding to renovate or repair a multifamily building, you can pursue short-term financing options such as a commercial bridge loan or hard money loan. These are an option if you need a quick turnaround. However, they usually come with high interest rates and fees.
- Traditional multifamily loans: Traditional multifamily financing is a solid option if you don’t meet criteria requirements for certain government programs. Traditional loans also have fewer property condition restrictions and allow for further investment opportunities.
Frequently Asked Questions (FAQs)
No. The FHA doesn’t offer commercial loans strictly for investment purposes and instead offers assistance to purchase multifamily properties in which the owner resides (with exceptions).
Usually, borrowers are only eligible to obtain one FHA loan. However, there are exceptions in cases such as relocation or co-signing.
Generally, a score of 580 and above is recommended to increase the chances of approval. However, this can vary by lender.
Bottom Line
FHA multifamily loans offer affordable and accessible financing opportunities to borrowers looking to purchase a multifamily real estate property. There are various types of FHA multifamily loans, and while eligibility requirements can be strict, it can be a worthwhile investment with favorable rates and terms if it’s suitable for your investment endeavors.
