FHA Multifamily Loan: Costs, Terms & Where to Find

An FHA multifamily loan is a multifamily mortgage issued by a qualified lender and insured by the Federal Housing Administration (FHA). FHA multifamily loans are used to purchase properties with 5+ units and are subject to FHA loan limits and qualifications. These are different than normal FHA loans and have rates between 3.2 – 4.9%.

How an FHA Multifamily Loan Works

The FHA doesn’t originate multifamily loans but instead insures them. This helps FHA approved lenders mitigate their risk and pass down savings to the borrower through lower interest rates and lower down payment requirements. While most multifamily loans finance buildings with 1-4 units, an FHA multifamily loan can only finance properties with 5+ units.

However, an FHA multifamily loan is seldom used when compared to other multifamily loan options. Ted Toon, Senior Advisor at HUD’s Office of Multifamily Housing, tells us that:

“The FHA is able to lend money to investors even when the market is down. They have historically played a countercyclical role in the market and they took off in 2008 when other lenders were collapsing due to the downturn in the economy. They represent approximately 5-10% of the multifamily loan market.”

This means that 90% – 95% of all multifamily loans come in the form of commercial multifamily mortgages for properties and commercial apartment loans. The reason for this is that the FHA has stringent qualification requirements, such as reserve requirements totaling 2% – 6% of the aggregate unpaid principal balance. Further, the FHA caps loan amounts at $57,133 – $66,657 per unit in the building.

For more information on alternatives to an FHA multifamily loan, you can check out our ultimate guides on the following:

• Commercial multifamily loans: 2 – 4 unit buildings
• Commercial apartment loans: 5+ unit buildings

However, if you’d like to get in contact with an FHA multifamily lender you can check out this FHA approved lender directory. Otherwise, continue reading for a detailed breakdown of FHA multifamily loans, including their costs, terms, qualifications, and who they’re best for.

3 Types of FHA Multifamily Loans

FHA multifamily loans are primarily used to acquire or refinance existing multifamily properties. These loans are referred to as 207/223(F) loans and aren’t for properties that need repairs. These represent the majority of FHA multifamily loans and are what we are going to focus on throughout this article.

However, there are also FHA loans for new construction projects and for rehabbing existing multifamily properties. They are broken into two categories: condominium projects and rental and cooperative housing. For reference, in 2015, the FHA insured mortgages for 192 rental and cooperative projects with 30,412 units, totaling $2.9 billion. There isn’t any data on condominium projects since most developers obtain alternative funding to purchase or develop the building.

FHA Multifamily Loan Options

Below are the 3 types of FHA multifamily loans:

1. FHA Multifamily Acquisition Loans

FHA multifamily acquisition loans are the most popular type of FHA multifamily loans, accounting for 500 projects with 70,142 units, totaling $4.5 billion in 2015. Although they do require certain qualifications to be met, they aren’t as difficult as FHA rehab and new construction loans. The rates and terms have to be approved by the FHA but are set by the FHA-approved lender.

Below is a table with loan limits, rates, and down payment amount for FHA multifamily loans:

FHA Multifamily Acquisition Loans at a Glance

FHA Multifamily Loan Rates & Terms

The FHA doesn’t determine the exact rates, but instead only works with FHA-approved lenders that set interest rates based on the borrower’s qualifications and market interest rates. The terms are usually the same with each lender and the costs are dependent on the loan amount and lender application fees.

FHA multifamily rates, terms and loan limits are generally:

• Interest rates: 3.2 – 4.9% (fixed)
• Term: 35 years
• Loan limits: $57,133 per unit (non-elevator buildings), $66,657 per unit (elevator buildings)
• Time to funding: 90 -120 days
• Application cost: Up to $25,000 (includes an appraisal, environmental study and 3rd party due diligence reports)
• FHA application fee: Usually 0.30% of loan amount plus per unit inspection fees of $30 per unit or 1% of the cost of repairs
• Good faith deposit: 1% of the loan amount
• Variable costs: Lender’s legal, title, and standard borrower closing costs totaling 2% – 5%

Overall costs vary based on the type of property you’re buying and the number of units. Usually, properties with more units have higher costs, but in return, usually, generate higher profits. It’s important to work closely with your FHA-approved lender and be aware of all of your costs before you make an offer on a property.

FHA Multifamily Loan Requirements & Qualifications

FHA multifamily loan qualifications are generally based on two criteria: the borrower and the property. The FHA doesn’t set borrower qualifications but instead has overall guidelines, letting the lender set their own minimum qualifications. However, the property must meet strict FHA guidelines in order to qualify for an FHA insured multifamily loan.

Typical FHA multifamily loan qualifications you should expect include:

• Borrower experience: Ideally 2+ multifamily projects but is up to the lender to approve and verify
• Credit score: No specific score or net worth, but instead a strong financial profile including FICO score (check your score free here) and income, investment portfolio and outstanding debt
• Down payment: Minimum of 15%
• Cash reserves: 2% – 6% of outstanding principal balance
• Minimum number of units: 5+ units with furnished kitchens and bathrooms

Properties that qualify for FHA multifamily loans are typically apartment buildings including high rise buildings with elevators and detached and non detached buildings. Mixed use buildings with residential and commercial spaces, as long as they’re predominantly residential ( for example, an apartment building with retail stores on the 1st floor) also meet the qualifications. So does a collection of single family homes that operate as a multifamily property.

The property must not need any major repairs and all minor repairs that the FHA inspector finds must be repaired within 1 year. The money to fund these repairs will be held in escrow until the repairs are made. The property must also be ADA compliant and meet all building codes and have working smoke detectors. Keep in mind, the property has to be built or renovated 3+ years prior to applying for an FHA multifamily loan.

Overall, the FHA wants to insure loans on multifamily properties that are in good condition with borrowers who will take care of the properties and keep them in good working order. Since the FHA offers competitive loan products, they want to ensure that borrowers are creditworthy and experienced in dealing with multifamily properties.

2. FHA Multifamily Construction & Rehab Loan for Rental/Cooperative Housing

FHA multifamily construction and rehab loans for rental and cooperative housing are loans that the FHA insures for specific types of housing. These types of housing include housing for the elderly, moderate income families, the handicapped, and single room occupancy (SRO).

SRO is a form of housing where 1-2 people are housed in individual rooms within a multiple tenant building. These units can be row units, walkups, elevator, detached or semi detached and have mortgage loan limits based on the size, type, structure, and location of the unit.

You must work with a Multifamily Accelerated Processing (MAP)-approved lender and submit the required exhibits, which the lender will advise you of, to complete the pre application stage. Then, if your exhibits are accepted, you can apply for a firm commitment application.

If this is approved, underwriting will be done and then a mortgage insurance commitment will be issued, upon approval. As you can see, the steps can be tedious and it’s a long process just to have your project approved.

3. FHA Multifamily Construction & Rehab Loan for Condominiums

These loan products are very specialized, and qualification requirements, terms, and more aren’t readily available online. Instead, you would need to reach out to a local HUD Multifamily Hub or Program Center to get application guidance and determine the feasibility of your desired multifamily project.

After this meeting, a site appraisal and market analysis need to be submitted for new construction condominium projects and a feasibility application for rehab projects. You’ll also have to submit a commitment application through an FHA approved lender. If the processed application meets FHA’s requirements, they will issue a commitment letter to the lender for mortgage insurance.

There haven’t been any loans issued in this program for several years. Most condo developers use their own financing for the construction of the building and only sometimes use FHA insured loans for the sale of individual condo units.

Where to Find FHA Multifamily Loans

Since the FHA doesn’t actually provide loans, you will need to find an FHA-approved lender who offers multifamily loans. The HUD lender search site lets you type in the state and city you’re looking for a lender, including the type of mortgage. For example, you can select a multifamily mortgage and it will give you a list of lenders and their contact information.

Keep in mind that there are nationwide, regional and local lenders on the site. Although some of the banks may be nationwide, they may only offer FHA multifamily loans in certain areas. It’s best to contact the bank directly to ask about their areas of operation, their borrower and property qualifications, and their interest rates and terms.

Here are 4 lenders that offer FHA multifamily loans:

Capital One

It’s best to contact them through their site. Click on the contact button and then fill out the contact form and a commercial loan specialist will call you. This will direct you to the correct department since their general phone number doesn’t go to the commercial loan department.

J.P. Morgan Chase Bank

Click on their “get in touch” button on the site. This will take you to a map of states in which they offer FHA multifamily loans. Lastly, click on “find a client manager” and all of that area’s client managers and contact information will appear. You can then call one to find out more information regarding your potential FHA multifamily loan.

Regions Bank

Scroll down to the bottom of their site and there’s a list of commercial loan originators and the territories they cover. Look and see if they offer FHA multifamily loans in your state and if they do, there will be a contact person’s name and phone number beside the state. You can just give them a call to start the loan application process.

Wells Fargo

Click on the “team” tab on their website which will take you to a map and a list of states that they offer FHA multifamily loans. Find your state and look below the map for the contact name and phone number to speak with a loan specialist. Then, give them a call to start the pre approval process.

6 Steps to Apply for an FHA Multifamily Loan

The FHA multifamily loan application process does vary by lender, but there are some general steps that you should be aware of before applying for an FHA multifamily loan. The process often takes longer than other loans, with application to closing usually 90- 120 days.

Below are 6 steps to apply for an FHA multifamily loan:

1. Choose an FHA Approved Lender

You should already have a property in mind to purchase. This is a little different than buying a residential property where you can get pre-approved before you find a property. You should know the basic details about the property, including its address, rent rolls, taxes, occupancy rate, and its approximate expenses. You meet with the lender or call them on the phone and discuss the property details and decide if you want to work with them.

2. Fill Out Loan Application

Assuming you want to work with the lender, they will ask you for some financial information and will check your credit, although this isn’t as important as in other loans since it’s a non recourse loan. They will ask you to gather any required documents like tax returns, proof of income etc.

However, the lender is more concerned that the property meets FHA guidelines and makes enough rental income to pay back the loan. The lender will turn in all of these documents to a Multifamily Hub or Program Center for review.

3. Qualify for a Firm Commitment

The Multifamily Hub or Program Center reviews your application to determine whether the proposed loan is an acceptable risk. At the same time, FHA does an underwriting analysis to determine if enough rental income is available to repay the loan, taking into account the property expenses. They will order an appraisal and inspection, which you’re responsible for paying for. They also look at the current market needs for housing and the borrower qualifications to make a decision.

4. FHA Mortgage Commitment is Issued

If your application meets the FHA’s multifamily program requirements, they will issue a commitment to the lender for mortgage insurance.

5. Lender Clear to Close

After the loan is approved by the FHA, it means that the FHA will insure the loan, putting the lender at less risk if you default. The lender will finish up any paperwork they may have, order title insurance, complete any outstanding inspections, such as inspections for minor repairs and then a closing date will be given.

6. Settlement

It’s recommended that you bring a real estate attorney to closing since multifamily deals are more confusing than residential contracts. The lender usually wires the funds to the title company and you bring a certified check or wire your down payment to the title company. All documents are signed, security deposits change hands and you get the keys to your new property. Keep in mind, there are many variables throughout the process and this is just an overview.

Who FHA Multifamily Loans are Right For

FHA multifamily loans are right for investors who want to purchase an existing multifamily property in good condition. They’re also right for investors who want to use a non recourse loan to finance a small, medium or large multifamily property with 5+ units, with a downpayment as low as 15%.

Some investors like that FHA multifamily loans don’t just depend on a FICO score (check yours for free here), but instead look at your overall financial standing, including your net worth and your investment portfolio. These loans are ideal for real estate investors who want to add multifamily properties to their portfolio and don’t want the hassle of dealing with debt service coverage ratios (DSCR) and debt-to-income ratios (DTI).

Most FHA multifamily loans aren’t right for investors who don’t have experience dealing with multifamily properties. FHA multifamily loans aren’t a good fit for investors who want a more ‘traditional’ multifamily option with 2-4 units either. They’re also not right for investors who want to rehab a property or fix and flip a property. If you’re interested in a loan to fix and flip a property, check out our in-depth guide on fix and flip loans.

Pros and Cons of FHA Multifamily Loans

Multifamily loans offer investors long term, non recourse financing options for properties with 5+ units. They generally have competitive interest rates, low down payments, and favorable terms. However, they do have some drawbacks, such as meeting FHA property condition guidelines.

Pros:

• Competitive rates, usually from 3.2% – 4.9%
• Non recourse loan help limits borrower’s personal liability
• No high balloon payment due at the end of the loan
• Nationwide FHA approved lenders gives investors choices as to where to get financing
• Loans offered for a variety of multifamily style properties

Cons:

• Property must be in livable condition and up to all current building codes
• Properties must meet Americans with Disabilities Act (ADA) requirements
• Closing can take up to 4 months from the time of the application process
• The borrower’s overall financial standing must be very strong for an FHA multifamily loan
• There are loan limits on each property dependent on the number of units and type of property

Alternatives to FHA Multifamily Loans

FHA multifamily loans generally provide savvy investors with competitive interest rates and low down payments, but they must meet FHA’s standards in order to qualify for a loan. If an FHA multifamily loan isn’t right for you, there are some alternatives.

These alternatives to FHA multifamily loans include:

• Portfolio loan: Can finance one or more properties at the same time and can be used on properties with 1-5+ units. They offer competitive interest rates and can be used to finance properties in any condition.
• Apartment loan: Can be used to fund the purchase of an apartment building and sometimes its renovation. An apartment building is a building with 5+ individual units. Interest rates vary depending on if you’re getting a short term or long term loan.
• Homestyle renovation loan: This is a permanent, government backed loan used to finance a second home or an investment property with 1-4 units. You can only finance 1 property at a time and short term loans aren’t available. These loans combine the acquisition and renovation of a property into 1 single loan.
• Traditional Multifamily Loan: Can be a good option for financing an investment property with 2-4 units. There are generally four types of these loans and they can be short term or long term. Some of the short term loans can finance properties in any condition.
• Normal FHA Loan: This is a good option for financing a single family home or a property with 1-4 units as long as you are going to be an owner occupant. These loans generally offer the lowest down payments, starting at 3.5%

FHA Mortgage Insurance

FHA mortgage insurance protects lenders against losses in case the borrower defaults on their mortgage. They offer the lender insurance since the FHA will pay a claim to a lender if the homeowner defaults. This insurance is how the lenders can offer borrowers competitive interest rates and in some cases, lower than industry standard, down payments.

All loans must meet certain FHA requirements to qualify for insurance. The FHA is part of the Department of Housing and Urban Development’s (HUD) Office of Housing and is the largest insurer of mortgages in the world. This just means that the FHA is an office of HUD and it’s helpful to be familiar with HUD since their sites are where all of the FHA multifamily loan and insurance information is located.

In 2015, the FHA insured mortgages for 500 multifamily projects with 70,142 units, totaling $4.5 billion.

Bottom Line

FHA multifamily loans aren’t as well known as FHA single family home loans, but they can help investors finance a variety of projects with 5 or more units. They offer competitive interest rates and lower down payment requirements than other multifamily loans. However, an FHA approved lender must issue the loan and the property must meet certain FHA requirements.