2 to 4 Unit Loan Options
What Are 2 to 4 Unit Properties?
Multi-family properties consisting of two, three or four separate liveable dwellings on the same real estate lot are considered small residential income property. These type of 2 to 4 unit real estate properties are an excellent way for a beginning real estate investor to understand and experience what is required to manage real estate, generate cash flow and possibly later on own larger income generating properties such as an apartment building or commercial real estate.
An added benefit of owning a 2 to 4 unit income property is that you have that layer of security with other rental helping you pay your mortgage. In essence, using other's people's money to pay for your asset, commonly referred to as passive income. This is a vital aspect as a successful investor. Review the table below for comparing the different financing options, interest rates, and cash flow scenarios when buying or refinancing a 2 to 4 unit property.
| If you are a veteran, will occupy the property, can provide Full Documentation, you can get 100% Financing | If you are not eligible for a VA loan, will occupy the property, provide Full Documentation & have at least 3.5% down | If you don't qualify for FHA or VA, and can provide Full Income Documentation your options are: |
| VA Loan "0" ( Zero Down) Loan Amount depends on county and state. |
FHA Loan 3.5% down up to $729,250 |
Conventional Loan 20% down to $417,000; Approx. 40% down for 2 units using Stated Income |
| $850,000 purchase = $0 down | $400,000 purchase = $0 down or $40,000 | $400,000 purchase = $0 down or $40,000 |
| 1st Loan of $680,000
5 Yr Fixed/ARM at 5.75% "Interest Only"= $3,258/mo 2nd Loan of $170,000 = $1,491/mo - Total = $4,749/mo |
Loan Amount of
$360,000
5 Yr Fixed / ARM Rate of 5.75% with "Interest Only" Payments = $1,725/month |
Loan Amount of
$360,000
2 Yr Fixed / ARM rate of 5.25% with "Interest Only" Payments = $1,575/month |
| Rental Income /
month = $4,800
Mortgage Payment / month = $4,749 +51 |
Rental Income /
month = $2,400
Mortgage Payment / month = $1,725 + $675 |
Rental Income / month = $2,400
Mortgage Payment/ month = $1,575 + $825 |
Earnest Money Deposit Requirements for Purchase (Conventional Loans)
Fannie-Mae permits a maximum of 80% LTV and CLTV, which means the borrower should leave no less than 20% earnest money if acquiring, or put down 20-percent earnest money deposit on the property when refinancing with requests for money back, whatever the quantity of home loans on the property. For three-to-four unit primary properties, the highest loan-to-value and combined loan-to-value is 75% for acquiring or refinancing 3-to-4 unit real estate.
In regards to Freddie Mac conforming loans, the highest loan-to-value LTV for the acquisition of your main residence consisting of two-to-four dwellings is eighty-percent. For investment real estate acquisitions or refinances, the maximum loan-to-value is 75-percent and 70-percent combined loan-to-value.
Cash Reserve Guidelines for Rental Property (Conventional)
Freddie-Mac and Fannie-Mae mortgages could also be utilized for primary residences or investor-owned properties which create rental revenue. Investment properties call for adequate funds in a reserve account to deal with potential loss of income as a result of unrented units and non-payment of rent by tenants. Together, Freddie and Fannie demand no less than six months savings of PITI to be eligible for a standard mortgage on 2 to 4 unit properties.
FHA Loans for 2 Unit Properties
Purchasing or refinancing a 2-unit property (also known as Duplexes) with an FHA mortgage continues the exact same guidelines since it will be for a one-family real estate. The one variation is that one of these units has to be your main home and you can advantageously apply 75% of the cash generated from the other rental, which will raise your overall income, to meet the criteria for that actual piece of property.
FHA 3-to-4-Unit Residential Income Properties - Buy or Refinance
For FHA 3-to-4-unit financing, you also have use one unit as your main residence, which means that it's essential to stay in one of the four units. The kicker here is that you are only required to place 3 1/2 % down on the FHA purchase mortgage loan. On a conventional loan (Fannie or Freddie), there are loan-to-value restrictions not to mention rate fees and/or adjustments that are more severe when it's a 2 to 4 unit property. Supplemental restrictions or requirements for three to 4 units with an FHA mortgage loan may apply but overall it is a better option than a conventional 2 to 4 unit mortgage.
FHA Required Assets
Liquid Reserves - As acquiring a 3 or 4 unit income property using an FHA loan, it's essential to have 3 months PITI in a bank account(s), brokerage account, IRA, etc. Unlike the earnest money deposit, the funds for reserve cannot be in the form of a gift.
VA Mortgage - 2 to 4 Unit Financing
Among the many benefits that the Veteran's Administration residential mortgage loan allows for past and current military service members is the ability to acquire a 2-to-4 unit real estate property whereby the VA buyer resides in one of the properties as their main residence similar to other methods. However, VA mortgage loans are especially distinct in that they enable a VA borrower to acquire a two to four unit residential property with 100% financing if they intend to reside in one of the dwellings as their main residence!
Rates above are examples and may not be actual market rates
Learn more about Interest Only Loans here.
For 5+ Units go to Apartment Loans| Real Estate for Sale in California
