Buy Duplexes with FHA Loan

How to Buy a Duplex with an FHA Loan

Can You Buy a Duplex with an FHA Loan?

Do you dream of having your tenants make your mortgage payment for you each month?  Have you ever thought of making your first home an investment home as well?

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FHA allows you to buy a duplex, live in one unit, and rent out the other side.  FHA also allows 3 and 4-unit properties, but the requirements are a little stricter.  We will talk more about that later.

How To Buy A Duplex With An FHA Loan

Several factors come into play when wanting to buy a duplex with an FHA Loan:

  • How much downpayment is required
  • How rental income is calculated as part of the FHA loan income requirements

How Much Downpayment Is Required to Buy A Duplex With an FHA Loan?

FHA loans only require a 3.5% down payment.  As long as you buy a multi-family home intending to live in one of the units, you can become a landlord following basic FHA guidelines.

Using Rent to Qualify for an FHA Loan For A Duplex – FHA Rental Guidelines 2022

Many first-time home buyers do not think about being a landlord.  One of the main reasons why you may not have considered buying units is that think it’s too expensive.  It’s true that a 2 unit home is more expensive than a single-family, but not by much.

What investors know that first-time buyers may not know, is that you can use rental income as qualifying income.  FHA guidelines allow you to use 75% of the rent you collect from the other part of the duplex as qualifying income.

Here’s an example of how this would work if you are buying a duplex using FHA financing.  This is a hypothetical scenario to show the potential for using rental income to amplify your affordability.

  • Property Type: 2 Unit Duplex
  • Purchase Price: $575,000
  • Monthly Income Required: $5,500
  • Monthly Rental Income: $2,000
  • Qualifying Rental Income: x 75% = $1,500
  • Your Minimum  Monthly Income Requirement: $4,000

By using 75% of the rental income on the second unit of your duplex, you immediately experience a 27% increase in your income towards qualifying for the larger loan size.

FHA 2-4 Unit Guidelines

We have discussed the FHA 2 unit guidelines above.  When buying a tri-plex or a four-plex, a downpayment of 3.5% is still all that is required for an FHA loan.

FHA multi-unit guidelines state that when buying a 3 or 4-unit property using FHA financing, the property needs to meet the self-sufficiency test’s rental income calculation.

The FHA Self-Sufficiency Test

Net Self-Sufficiency Rental Income refers to the Rental Income produced by the subject Property over and above the Principal, Interest, Taxes, and Insurance (PITI).

The PITI divided by the monthly Net Self-Sufficiency Rental Income may not exceed 100 percent for three- to four-unit Properties.  Another way to look at it is, the total rents that can be generated from the property must at least be able to cover the PITI payment.

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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.

Additional reserve requirements are also imposed when buying 3 and 4 unit properties.  You must have 2 months PITI in liquid reserves, in addition to having all down payment and closing costs covered.  This is not required when buying a 2 unit duplex.

What is the FHA Loan Limit for a Duplex, Tri-plex, or Four-plex?

The FHA has a limit to the amount they will guarantee on a mortgage loan. These amounts depend on the price of real estate in your particular area. These amounts are re-evaluated and will normally change every year.

These amounts are ceiling amounts, meaning that they are the maximum amount of loan you can get using an FHA loan.

2022 FHA Lending Limits – Low-cost Areas:

  • Single-family dwelling: $420,680
  • Duplex: $538,650
  • Tri-plex: $651,050
  • Four-plex: $809,150

2022 FHA Lending Limits – High-cost Areas:

  • Single-family dwelling: $970,800
  • Duplex: $1,243,050
  • Tri-plex: $1,502,475
  • Four-plex: $1,867,275

Whether your property is in a low-cost or a high-cost area depends on the county where the property is located.

FHA Loan For An Investment Property

People frequently ask whether an FHA loan can be used for an investment property. The simple answer is no, FHA loans cannot be used for investment properties, with some exceptions.

Buying A Duplex As Your First Home – FHA Owner Occupancy Requirement

The FHA requires that the owner must live in the property being financed for the majority of the year. That property must be the owner’s principal place of residence for at least one year. If there is more than one person on the loan, at least one of those must live in that home to be eligible for the loan.

This means that summer cabins, properties purchased solely for rental, AirBnB rental, or traditional investment properties would not qualify for FHA financing.

Note: the FHA owner-residency requirement is that you have to live in at least one of the units for at least one year. After that year, you could move out of that unit into a different property, potentially enabling you to collect rent on that unit too. 

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Exceptions to the FHA Owner Occupancy Requirement

Some exceptions to the FHA Owner Occupancy Requirement do apply.

One has already been mentioned: if the owner purchases a duplex, triplex, or four-plex and lives in one of the units as their primary residence, they can earn the income from the other properties (and even use it to help qualify for their FHA loan.)

Second, if your job relocates you to another area beyond reasonable commuting distance or where affordable rental housing is not available, you may be able to rent out the first home (in this case, a unit in your duplex, triplex, or four-plex) if you lived in it as your primary residence for over a year.

Third, if your home has become too small for your growing family and you’ve passed the one-year residency requirement, you can rent it out while living in a second home.

Fourth, if you become disabled or otherwise incapacitated, you may be able to make up your lost wages by renting out rooms in your home to boarders.

How Many FHA Loans Can You Have?

Similarly, since FHA loans cannot be used to buy investment properties, you are generally only allowed to have one FHA loan at a time.

How Many FHA Loans Can You Have In Your Lifetime?

Although you are generally only allowed to have one FHA loan at a time, you can get multiple FHA loans during your lifetime if you only hold one FHA loan at a time.

Exceptions to the Rule of Only Holding One FHA Loan at a Time

There are times when you may be able to hold more than one FHA loan at a time, including:

  • Leaving a property that is owned together with someone else (such as a divorce,) and the previous owner will remain in the first home.
  • You co-signed on an FHA loan with someone else and now wish to purchase your own home.
  • Your job relocates you to another area that’s outside of reasonable commuting distance or where no affordable rental housing is available. 

Can you Use an FHA Loan To Buy After Bankruptcy, Foreclosure Short Sale, or Deed in Lieu of Foreclosure (DIL)?

Buying After Bankruptcy, Foreclosure, Short Sale, or Deed in Lieu of Foreclosure (DIL)

Having a bankruptcy, foreclosure, short sale, or deed in lieu of foreclosure in your past will not prevent you from buying a 2, 3, or 4 unit, multi-family property using FHA financing.  The waiting periods for buying after financial hardship is as follows:

Bankruptcy

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You can us an FHA loan to buy 2 years from the discharge of a Chapter 7 bankruptcy or 1 year after the discharge of Chapter 13.  This is a shorter waiting period than conventional financing, which requires a 4-year wait from the discharge of Chapter 7, and 2 years from the discharge of a Chapter 13 bankruptcy.

Foreclosure, Short Sale or Deed in Lieu

You can use an FHA loan to buy  3 years from the date your name is removed from title through a Foreclosure, Short Sale, or Deed in Lieu.  If the loan being paid off is also an FHA loan, your waiting period will begin when the HUD Mortgage insurance claim is paid.  This is called “clearing CAIVRS”.  CAIVRS is the tracking system for tracking federal student loans, and FHA mortgage insurance claims.  Its full name is Credit Alert Verification Reporting System.

Waiting Periods

Waiting periods begin on the date that the event is recorded.  After the waiting period, you may not be able to get approval (or FHA number) until after the period is over.  This is unlike conventional mortgage waiting period which require that you sign loan documents after the waiting period is over.

You can, and should have a loan officer review your income and asset information, and look at your credit report so that they can research all of the actual waiting periods to the day.  This is called a “credit qualifying” review.  At the end of this review, you will know exactly what day you can begin the approval process.

Related Reading:  Buy Again After BK, Foreclosure, Short Sale or DIL – Updated Guidelines

Frequently Asked Questions About Using FHA Loans For A Duplex

How much money down is required for an FHA loan?

Whether you’re buying a single-family home, a duplex, tri-plex or four-plex, the minimum downpayment on any FHA loan is 3.5%

Can I use an FHA loan for an investment property?

No, FHA loans cannot be used for investment properties, except you can get an FHA loan for a duplex, triplex, or four-plex and live in one of the units. The remaining units can be rented out to bring you investment income.

How many FHA loans can you have at one time?

FHA rules state that you can only have one FHA loan at a time, to prevent FHA loans from being used to purchase investment properties.

How Much Do Duplexes Cost?

According to Fixr.com, the average cost in 2022 to build a duplex range from $285,000 to $537,000 with an average cost of $388,000 for a 3,000 foot side-by side 2 story duplex. The cheapest form of a duplex is a stacked duplex (one unit on top of the other) averaging $142,500 for a 1500 square foot stacked duplex. The most expensive duplex format is a side-by-side single-story duplex with a 5,000 square foot side-by-side single-story duplex averaging $1,100,000 to build. 

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Check your local listings to find current prices in your market for pre-built duplexes.

Can I get an FHA loan on a second home?

Generally, no. FHA requirements prohibit use of an FHA loan for an investment property or a home you live in for less than the majority of the year.

Working with an experienced loan officer

If you are being told that you cannot do something, it may not always mean that you don’t qualify.  Qualifying for a home loan equal to hundreds of thousands of dollars is not something that can be done by a computer, or a machine.  It can be extremely complex and challenging for some buyers.

Do not get discouraged if a loan officer tells you “no”.  They might have just done you a favor.  If the lender that turns you down does not explain to you in detail the reason why you cannot qualify, it may just mean that they don’t want to try.

An experienced loan officer will explain to you why you do not qualify now, and what it would require for you to qualify in the future.  An experienced loan officer will educate and empower you so that you are making more informed decisions.

If you’re having trouble getting answers, add your questions below.  All questions are monitored and will be answered quickly.

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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  • Brenda says:

    As a first time homebuyer is it better to buy a duplex using an FHA loan or conventional loan?
    When using an fha loan, could I relocate in 6 months and could my taxes come from a neighboring state?

    • Scott Schang says:

      Hi Brenda, FHA is only going to require a 3.5% down payment to buy a duplex. Conventional financing requires 15% down.

      FHA requires that the home remain “owner-occupied” for at least one year, but there’s is no penalty if you have an emergency and must move.

      Where you would run into issues is if you tried to apply for another FHA loan, you would have to explain why you only stayed in the previous home for 6 months.

      If you have further questions, feel free to email me directly at scott@findmywayhome.com

      I hope this helps?

  • Rachel says:

    Are there any stipulations on an FHA loan for a duplex? A minimum amount of savings? A minimum down payment amount?

    • Scott Schang says:

      Hi Rachel, I just replied to your email as well. You do not need 15% down to buy a duplex with FHA. Only 3.5% down payment is required.

      There are also typically no reserves required. You are not being given FHA guidelines.

      I’m happy to introduce you to someone that I know and trust that will be straight with you!

      If you would like a second opinion, I just need to know what State you’re trying to buy in.

      Hope this helps?