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Down Payment When Buying Multi Family Units

How much down payment is required for a conventional loan for a multi-family property?

Savvy home buyers can buy up multi-family properties with as little as 3.5% down payment.

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The key to having a low down payment on a multi-property is to live in one of the units for at least two years. This turns your loan from an investment property loan (which has its own requirements) into an owner-occupied loan, which has huge advantages in many ways.

The return on this investment is being multiplied as savvy home buyers are buying up multi-family properties with as little as 3.5% down payment (with an FHA loan.) and living in one of the units for at least 2 years.

If you use a conventional loan for an owner-occupied multi family property, the minimum downpayment for a duplex (2 Units) is 15%, for a triplex or four-plex (3-4 Units) the minimum down payment is 25%.

If you use a VA Loan for an owner-occupied multi-family property the minimum downpayment for 2 – 4 Units is nothing. Yes you could get in with no down payment (based on County loan limits, and eligibility from Certificate of Eligibility (COE)

As more and more home buyers are figuring out this ninja trick for getting your mortgage payment paid by your renters, I want to arm you with the knowledge of how to qualify to take advantage of this investment strategy.

Buying Multi-Family Properties

Many people recognize the huge power of buying multi-family properties (duplexes, tri-plexes, or fourplexes) as part of their real estate and investment strategies. And the power of buying multi-family homes increases considerably if you live in one of the units for at least 2 years after purchase.

But before we get started, let’s do a bit of definition:

What Is A Multi-Family Home?

No, it’s not a house where you cram a bunch of people in. A multi-family home is one where several different families each have their own isolated portion of the property, with their own door, kitchen, bathrooms, etc. 

Think of a duplex – one building, but with two separate front doors, and it’s clearly divided into two halves of the same building. 

Multi-family homes are traditionally duplexes (two families), triplexes (three families,) four-plexes where four families live.

Owner-Occupied Investment Strategies

There are many reasons to buy a home.  There are even more reasons to use your real estate investment to its maximum potential by buying 2, 3, and 4-unit homes.  As I write this, rents are at an all-time high and there’s no sign they will be coming down any time soon.

By living in the home for two years, you will qualify under the current capital gains exemption if you sell the property.  What this means is that you can gain up to $250,000 in profit from the sale of your property for a single person, or $500,000 in profit from the sale of your property.  You should consult a tax professional to see how homeownership will affect your tax savings.

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This can also work for first-time buyers. For a first-time home buyer to invest in a multi-family home will require higher initial cash reserves and down paynment (versus purchasing a single-family home) the fact that they will likely have little to no ongoing monthly mortgage payment makes this a very attractive option for first-time home buyers. 

Plus, this can be a great jumping-off point for a first-time buyer or someone else to get started in real estate investing by buying a multi-family home, living in one of the units for two years (making it an owner-occupied multi-unit property, entitling them to lower down payment and credit requirements,) then using that as a springboard after those two years to build a larger real estate portfolio.

The qualifying guidelines and down payment required differ depending on which type of financing you’re applying for.

Conventional Financing – Owner-Occupied Multiple Income Housing

Buying an owner-occupied multi-unit property using a conventional loan will require that you understand the qualifying guidelines:

Minimum Down Payment Requirements – Multi-Family Conventional Loan

  • 2 Units – 15% Down Payment
  • 3-4 Units – 25% Down Payment

Credit Score and Reserve Requirements / PITI – Multi-Family Conventional Loan

  • 2 Units – 660 FICO to 700 FICO – 6 months PITI / 640 FICO to 680 FICO – 12 months PITI

In other words, if you have six months of your principal, interest, taxes, and insurance on hand as a reserve (in savings or liquid investments,) you can buy a 2-unit multi-family home with a credit score as low as 660. If you have 12 months of PITI on reserve, you can get it with a credit score as low as 640.

  • 3-4 Units – 680+ FICO – 6 months PITI / 660 FICO to 680 FICO – 12 months PITI

Maximum Debt to Income Ratio (DTI) – Conventional Loan Multi-Unit

  • 45% back end (including housing and credit liabilities)
  • 50% back end with compensating factors.  My experience has been that loan to value under 80%, reserves, and good credit scores can meet compensating factors and give an approve/eligible decision over 45% debt to income ratio.

Use of Rental Income to Qualify

  • 75% of lease rental agreements from unoccupied units can be used toward qualifying debt-to-income ratio. It is possible with 3 & 4-unit properties to cover most, if not all of the mortgage payment.

FHA Insured Financing – Owner Occupied Multiple Income Housing

Buying owner-occupied units using FHA financing will require that you understand the qualifying guidelines:

How Much Down Payment Is Required for an FHA Owner-Occupied Multi-Family Loan?

Minimum Down Payment Requirements

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  • 2 – 4 Units – 3.5% down payment – FHA Loan Multi-Family

Reserve Requirements / PITI – FHA Loan Multi-Family

  • 2 Units – One-month PITI
  • 3-4 Units – Three months PITI

Maximum Debt to Income Ratio (DTI) – FHA Loan Multi-Unit

  • 46.99% front end (housing payment only)
  • 56.99% back end (including credit liabilities)

Net Self-Sufficiency Rental Income – FHA Loan Multi-Family

  • Net Self-Sufficiency Rental Income is calculated by using the Appraiser’s estimate of fair market rent from all units, including the unit the Borrower chooses for occupancy, and subtracting the greater of the Appraiser’s estimate for vacancies and maintenance, or 25 percent of the fair market rent.

VA Veteran Guaranteed Financing – Owner Occupied Multiple Income Housing

Buying owner-occupied units using VA financing will require that you understand the qualifying guidelines:

How Much Down Payment Is Required for a VA Owner-Occupied Loan For a Multi-Unit Property?

Minimum Down Payment Requirements – VA Loan, Multi Family Owner Occupied

  • 2 – 4 Units – no down payment (based on County loan limits, and eligibility from Certificate of Eligibility (COE)

Reserve Requirements / PITI – VA Loan, Multi-Unit Owner Occupied

  • 6 Months PITI

Maximum Debt to Income Ratio (DTI) – VA Loan, Multi Family Owner Occupied 

  • Automated Underwriting debt-to-income ratios is flexible based on compensating factors like reserves and residual income.
  • VA’s debt-to-income ratio is the total monthly debt payments (housing expenses, installment debts, and so on) to gross monthly income. It is a guide and, as an underwriting factor, it is secondary to the residual income.   It should not automatically trigger approval or rejection of a loan. Instead, consider the ratio in conjunction with all other credit factors. A ratio greater than 41 percent requires close scrutiny unless the ratio is greater than 41 percent solely due to the existence of tax-free income (Put notation regarding the tax-free income in the loan file or calculate an adjusted, smaller ratio based on “grossing up” of the tax-free income.), or residual income exceeds the guideline by at least 20 percent.

Use of Rental Income to Qualify – VA Loan, Multi-Family Owner Occupied

  • 75% of lease rental agreements from unoccupied units can be used toward qualifying debt to income ratio. It is possible with 3 & 4 unit properties to cover most, if not all of the mortgage payment.

Sound Investment Strategy

You would be surprised when you actually calculate the potential monthly income from 3 rental units (assuming you own a fourplex and live in one of the units.)  Even though you can only use 75% of the gross rents as qualifying income, the actual gross income is 100% of the rents collected.

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In most, if not all cases, you can come close to, or completely cover your total mortgage payment, including principal and interest, and mortgage insurance if buying using a 3.5% down payment FHA insured loan.

Being able to buy a 1.2 million dollar, four-unit property that cashflows with only a 3.5% down payment is crazy not to consider. You’ll definitely need to run the numbers first, but even with higher than recent interest rates, At the time of this writing, given the high rental costs you can charge, you can very likely pay the mortgage on the property through the income from the other three units or come very close to it.

Using conventional financing, your rate can vary greatly based on loan-to-value and credit score.

Any way you cut it, making your first home an owner-occupied rental income property is a smart way to get your real estate investment strategy off to a positive start.

Frequently Asked Questions – Owner-Occupied Multi-Family Units

How much down payment is required for a multi-family property?

If you don’t plan on living in one of the units, a minimum of 25% down payment is usually required. However, if you plan to live in one of the units, down payment requirements can be as low as:

  • Conventional loan: 2 Units – 15% Down Payment, 3-4 Units – 25% Down Payment
  • FHA loan: 2 – 4 Units – 3.5% down payment
  • VA Loan: 2 – 4 Units – no down payment (based on County loan limits, and eligibility from Certificate of Eligibility (COE)

What is the mortgage on a multi family property?

The mortgage on a multi family property will generally be the same as it would be on a single family property for a loan of that size. Let’s say your mortgage is for a $1 million loan. A 30 year mortgage at 7%, your principal and interest on that loan would cost you $6,653 a month.

If that’s for a single family house, you’re going to have to have a pretty high-paying job to be able to come up with over $6,650 every single month for your mortgage payment.

But let’s say that same million dollar mortgage was on a four-plex and you lived on one of the units. That means you’d have renters living in the other three units. If each of them paid you $2,500 in rent each month, you’d have enough to pay the mortgage payment on that property, so you’d get to live there for free.

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So what’s the mortgage on a multi family property? If you do it right, it could potentially be nothing!

How do I buy multi family homes?

The process of buying multi family homes is, at it’s root, similar to buying a single family home. You’ll probably want to work with a broker, or to be part of a network of people buying and selling multi family homes. When one becomes available, you’ll want to check out its condition.

The difference is that you’ll also want to check out the status of the rental part of that property. What is its rental history? How many months a year does one of the units sit vacant? What rent is being charged on each of the units? Are those rents consistent with similar properties in your local market? When does each rental contract expire and what do those contracts look like? What is the average upkeep on those units each year? 

Once you’ve established all that, you’ll want to decide whether you’d be living in one of the units for at least 2 years, making it an owner occupied home, and qualifying you for additional advantages and savings on your mortgage.

Then you’ll want to work with a mortgage lender who understands and frequently works with multi-unit properties who will help you through the process of securing your loan and closing on the property.

Have Questions About Multi-Family Financing Or Other Mortgage Issues?

We can help! You can Ask Your Question here, and we will connect you with a Mortgage Expert in your area that can help, or you can find a Mortgage Expert Near You below this article.

About the Author

Scott Schang

A 20+ year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues and making sense of complicated real estate and mortgage topics on this website since 2007

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  • Fabricio Toledo says:

    hi Scott,
    your info is great.
    I am a realtor in Miami , its hard to qualified for a loan as a realtor ! since all years are different commissions earning.

    • Scott Schang says:

      Hi Fabricio,

      I completely understand your frustration. Being self employed, there are very few options for us to use traditional financing methods. As self employed people, our goal is to always write off as much of our expenses as possible. This puts us in a very challenging spot when you file your taxes, because if you don’t pay taxes on it….you can’t use it.

      I am starting to see bank statement, and asset depletion programs come back onto the market. I am cautiously optimistic that a true self employed loan that takes gross earnings into consideration is on it’s way.

      Thank you for the kind words 🙂