What an FHA Multifamily Loan Is
This article is part of a larger series on Business Financing.
An FHA multifamily loan is a mortgage loan, issued by a lender and insured by the Federal Housing Administration (FHA), that’s used to purchase a property with five or more units. These loans are subject to FHA loan limits and qualifications.
FHA loans have lower interest rates and down payment requirements than conventional mortgages. FHA multifamily loans are different from standard FHA mortgage loans, and it can be difficult to find a lender that offers them.
If you’re looking for an FHA multifamily loan, the United States Department of Housing and Urban Development (HUD) can help. The organization has an online directory dedicated to FHA-approved lenders. Check out the HUD lender list page to begin your search for an FHA multifamily lender near you.
There are three types of FHA multifamily loan options:
- FHA multifamily acquisition loan: Best for most borrowers as it’s used to purchase or refinance existing multifamily buildings
- FHA multifamily construction/rehab loan for co-ops: Best for borrowers looking to build or renovate cooperative housing units like senior care facilities or low-to-moderate-income housing
- FHA multifamily construction/rehab loan for condos: Best for borrowers looking to build or renovate condominiums
FHA Multifamily Loans Rates, Terms & Qualifications
Many properties that qualify for the FHA’s multifamily financing are apartment buildings, including high-rise buildings with elevators. Detached and nondetached buildings can also be eligible, as well as mixed-use buildings with residential and commercial spaces, so long as they’re predominantly residential.
The property must be in good condition and not in need of any major repairs. The FHA inspection is stringent, and all things found by the inspector must be repaired within one year. The building must have been built or renovated three or more years before applying for an FHA multifamily loan.
Interest rates are set by the specific lenders and not the FHA. For more information on interest rates, check out the HUD lender page to find a specific FHA multifamily loan lender.
Before pursuing an FHA multifamily loan, check out our guide that shows how to get a small business loan—it’ll give you the basic information needed to obtain any business loan. All government-backed loans, including FHA multifamily loans, will have specific guidelines that other types of investment property financing may not have, so be sure to consult your tax and legal advisors during the process.
Types of FHA Multifamily Loans
There are three types of FHA multifamily loans. While each may share some of the same qualifications and terms, each has slightly different requirements.
FHA Multifamily Acquisition Loan
The most common type of FHA multifamily loan is the multifamily acquisition loan, which is used to purchase or refinance a property. This loan is easier to qualify for than the two types of construction or rehabilitation loans.
These loans are classified under sections 207/223(f) with HUD. Loan to value ranges from 83.3% for market-rate projects up to 90% for section 202 and 202/8 direct loans, which are loans for housing for the elderly or disabled.
The length of the mortgage cannot exceed either 35 years or 75% of the estimated life of the physical improvements, whichever is less. The remaining life of the project must be long enough to permit a 10-year mortgage.
FHA Multifamily Construction & Rehab Loan for Rental/Cooperative Housing
This loan type covers specific housing types, including housing for the elderly, moderate-income families, and the disabled, as well as single-room occupancy (SRO).
SRO is where one to two people are housed in individual rooms within a multiple-tenant building. Section 202 and 202/8 loans fall under this category, as well as section 221(d)(4) loans, which allow for terms of up to 40 years.
Building types in this category include detached, semidetached, row, walkup, or elevator-type rental or cooperative housing.
FHA Multifamily Construction & Rehab Loan for Condominiums
The least common and most specialized loan type insured by the FHA is the multifamily construction/rehab loan for condos. It’s insured under section 234(c). They can be tough to find. It has been many years since this type of loan has been insured, so be sure to check with an FHA program center before considering this type of project.
Who FHA Multifamily Loans are Right For
An FHA multifamily loan is a strong choice for an investor looking to purchase an existing multifamily home in good condition. It’s also a good choice for investors looking for a nonrecourse loan to finance a multifamily property with more than five units with a down payment as low as 10% and a DTI ratio of up to 67%.
These loans aren’t the best choice for investors lacking experience dealing with multifamily properties or looking for a quick fix-and-flip project.
Here are some pros and cons to FHA multifamily loans:
| PROS | CONS |
|---|---|
| Competitive interest rates | Property must be in good condition and Americans with Disabilities Act (ADA)-compliant |
| Nonrecourse loan limits borrower’s personal responsibility | Closing can take four to six months |
| No high balloon payment at the end | There are loan limits based on the number of units and type of property |
Alternatives to FHA Multifamily Loans
If you decide that an FHA multifamily loan isn’t the best choice, here are several alternatives to consider:
- Portfolio loan: This type of loan allows you to finance multiple properties and properties with one to five or more units. Interest rates are competitive, and properties can be in any condition.
- Apartment loan: This loan can be used to purchase and renovate an apartment complex that has five or more units. Interest rates can vary depending on the length of the loan term.
- Traditional multifamily loan: This loan is a good option for investment properties with two to four units. Some short-term loans can even finance properties in disrepair, but interest rates can be higher.
Bottom Line
FHA multifamily loans can be harder to find than traditional, single-family FHA loans. However, FHA multifamily loans can allow you to finance projects with five or more units, competitive rates, low down payments, and higher DTI requirements. The loans are issued by lenders and insured by the FHA, and the property must meet specific requirements. Consult both your financial and legal advisors before considering an FHA multifamily loan.
