Options for 2-4 Unit Loans on Multifamily Properties
Many people choose to own a 2-4 unit residential property to obtain passive income and to help cover the mortgage payment.
These small residential income properties are also known as a duplex, triplex or fourplex and are an excellent choice for the beginning real estate investor as well as the experienced investor.
What is a Duplex?
A duplex is two residential units on one parcel of land. A duplex can be one building with two separate units that each have their own legal address or two separate residential buildings on the same lot. A triplex or fourplex (quadruplex) follows the same logic with three or four separate units on one lot.
For new investors, you'll learn first-hand what your financing options are to comfortably retain a 2-4 unit multifamily property, generate cash flow, and later on possibly consider owning a larger income producing property like an apartment building with 5 or more units.
An added benefit of owning a 2 to 4 unit income property is that you have that extra layer of security from the other rentals helping to pay your mortgage.
To put it simply, you are using other people's money to pay for your wealth growing asset. This technique is commonly referred to as "passive income" and is a vital aspect when it comes to successful real estate investing.
See the informaton below to compare the different financing options, interest rates, and cash flow scenarios when seeking to buy or refinance a California 2 to 4 unit property.
Down Payments for a Duplex, Triplex or Fourplex
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If you are not eligible for a VA loan, but will occupy the property, can provide full income and job documentation for the most recent 2 years, & have 3.5% down on 2-4 units, you may be qualified for an FHA Loan.
EXAMPLE: Buying a fourplex with an FHA loan
Purchase Price─ $1,200,000
Down Payment required─ $42,000 or 3.5% of $1,200,000 (loan limit depends on the county)
Property Use─ Primary Residence
New Loan─ $1,158,000 with mortgage insurance
Payment─ 30 Year fixed rate of 3.25% with payments of $5,040 per month
Rental Income─ $1,600 * 3 units = $4,800
Net effective payment is just $240 principal & interest (PI). $5,040-$4,800
IMPORTANT: For FHA 3-4 unit financing, there is a self-sufficiency test the property must pass for qualifying purposes.
[RELATED: See the FHA 2021 loan limits for 2-4 units in Caifornia.]
If you served in the military and qualify for a VA loan, 100 percent financing may be possible. NOTE: You must live in one of the units and provide full income and employment documentation. Keep in mind the maximum loan you can get with zero down may be less than you need due to qualifying guidelines.
EXAMPLE:Buying a Duplex in Oceanside, CA Purchase price
Down Payment required─ $0 if your income and credit qualifies
Property use─ Primary residence
New loan─ $950,000
Payment (Principal & Interest)─ 30 year fixed at 3.00% is $3,786 per month
The rental income each month is $3,000 from the other 2 units
Net effective payment─ $786
The 2021 conforming loan limit for a duplex is $898,050 in San Diego County. A VA loan allows you to go above that limit
Purchase price:$─ 950,000
Look at the following examples if you want to buy a 2-4 unit under a traditional qualifying guidelines by providing your tax returns, income, employment and asset documentation.
EXAMPLE: Buying a Culver City Triplex Purchase price
Down Payment required─ 20-percent or $260,000; subject to income and credit approval
─ For duplex properties, the minimum down pament is 15 percent based on fannie/freddie guidelines.
Property use─ Owner occupant
New loan─ $1,040,000
Payment (Principal & Interest)─ 30 year fixed at 3.00% is $4,385 per month
The rental income each month is $4,000 from the other 2 units
Net effective payment─ $385
If you want to buy it and rent all units out the rate is higher by approximately .75- to 1- percent.
There is also an interest only payment option if you have a 25 percent down payment. This may save you $1,000 or more per month.
Conventional financing offers far better rates if your loan fits into the maximum loan amount guidelines. If not, then these two options below are worth exploring.
Purchase price:$─ $1,300,000
No Tax Returns
If your tax returns show little income due to significant write-offs, you're self-employed and can provide other income documentation like 1 to 2 years of bank statements to qualify or have $1 million or more in liquid assets, your options are:
EXAMPLE: Buying a Triplex in Huntington Beach, CA Purchase price
Down Payment required─ 25-percent or $375,000; subject to income and credit approval
Property use─ Owner occupant
New loan─ $1,040,000
Payment (Principal & Interest)─ 30 year fixed at 4.75% = $5,425 per month
The rental income each month is $3,800 from the other 2 units
Net effective payment─ $1,625
If you want to buy with just 15 percent down, the rate is .75- to 1- percent higher.
Purchase price:$─ $1,300,000
If you're buying a 2-4 unit as an investor (non-owner occupant), your options are:
25% down with Fixed Rate Mortgage;
35% down with an ARM
You need a 720 middle credit score in high-cost areas. Rates in the high 4 to low 5's.
Non-Prime - Traditional
10% down with 720 score;
Credit score needed is 700+. Rates in the mid 5% range.
Bank Statement Loan
15% down with 700 score;
Best interest rates are for those with 760 or higher credit scores.
Interest Only Payments
25% down with a 680 middle credit score;
Best interest rates are for those with 780 or higher credit scores.
Qualify with ONLY the Property's Income
- 20% down with a 680 credit score; 5/1 ARM from 5.875% and up.
No Job and No Personal Income disclosed. Available on 7/1 or 10/1 ARMs or 30 Year Fixed. Other conditions may apply.
Stated Income Loan
-- loans up to $2 million on non-owner occupied 2-4 units
-- 25% down on a 7/1 ARM with a 650 credit score; 7.99%
-- 600-649 credit score requires 30% down
-- rates start at 6.99% at 50 LTV
This is not a commitment to lend. Rates shown above are subject to change without notice.
Refinancing a Duplex, Triplex or Fourplex
The same qualifying guidelines apply yet the maximum loan to value on refinances are typically lowered by 5-10 LTV. Rates are excellent under traditional guidelines for borrowers with high credit scores & 20-percent equity at less than 3 percent.
Cash Reserve Guidelines for Rental Property
Freddie-Mac and Fannie-Mae mortgages may also be utilized for primary residences or investor-owned properties which create rental revenue.
Underwriters who analyze investment properties focus on the borrower having plenty of funds in a reserve account to deal with potential loss of income resulting from unoccupied units and non-payment of rent by tenants.
Collectively, Freddie and Fannie demand at the very least six months of PITI to be considered for a conventional mortgage on 2 to 4 unit properties.
Liquid Reserves. When looking to acquire 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 reserves cannot be in the form of a gift.
FHA Financing Explained
Buying or refinancing a 2-unit property, Duplex, with an FHA mortgage continues in line with the exact same guidelines as it is for a single-family property.
The one variation is that you can add 75% of the monthly cash generated from the other rental to income. In effect, this will raise your overall income to help you meet the debt to income ratio condition for that particular property.
FHA 3 to 4-Unit Conditions
For FHA 3-4-unit mortgage loans, you are still required to use one of the units as your main residence, which means that it's a requirement to live in one of the four units.
The huge benefit here is that you are only required to bring in 3 1/2 percent down of the purchase price.
With a conventional mortgage (Fannie or Freddie), there are higher down payment requirements not to debt to income limits and/or mortgage insurance add-ons that hurt your net income when it's a 2 to 4 unit property. Further requirements for 3 to 4 units using an FHA mortgage loan may apply but overall it is a better down payment option than a conventional financing on a 2 to 4 unit property. A self-sufficiency test comes into play for an FHA-financed triplex or fourplex. Basically, the market rental income from all units multiplied by a .25% vacancy factor must cover the new monthly mortgage payment, insurance, and taxes.
See related info for owners about the Advantages and Disadvantages of Duplexes, Triplexes, Fourplexes
Rates above are examples and may not be actual market rates.
For 5+ Units go to Apartment Loan Financing
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