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Down Payment Buying Multi Family Units

Down Payment When Buying Multi Family Units

Buying Multi Family

With interest rates as low as they are after 1st quarter 2016, home loan financing is a powerful investment tool.

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.

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.

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Owner Occupied Investment Strategies

There are many reasons to buy a home.  There are even more reasons to use your real estate investment to it’s maximum potential by buying 2, 3 and 4 unit homes.  As I write this in May 2016, rents are at an all time high.  Add that into the equation where rates are close to all time lows, and you have the perfect recipe for mostly positive cashflow.

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

Conventional Financing

Buying owner occupied units using a conventional loan will require that you understand the qualifying guidelines:

Minimum Down Payment Requirements

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

Reserve Requirements / PITI

  • 2 Units – 660 FICO to 700 FICO – 6 months PITI / 640 FICO to 680 FICO – 12 months PITI
  • 3-4 Units – 680+ FICO – 6 months PITI / 660 FICO to 680 FICO – 12 months PITI

Maximum Conventional Loan Amounts (Orange & LA County, CA)

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  • 2 Units – $800,775
  • 3 Units – $967,950
  • 4 Units – $1,202,925

Maximum Debt to Income Ratio (DTI)

  • 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 agreement 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

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

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Minimum Down Payment Requirements

  • 2 – 4 Units – 3.5% down payment

Reserve Requirements / PITI

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

Maximum Debt to Income Ratio (DTI)

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

Maximum FHA Loan Amounts (Orange & LA County, CA)

  • 2 Units – $800,775
  • 3 Units – $967,950
  • 4 Units – $1,202,925

Net Self-Sufficiency Rental Income

  • 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.

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VA Veteran Guaranteed Financing

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

Minimum Down Payment Requirements

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

Reserve Requirements / PITI

  • 6 Months PITI

Maximum Debt to Income Ratio (DTI)

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  • Automated Underwriting debt to income ratios are flexible based on compensating factors like reserves and residual income.
  • VA’s debt-to-income ratio is a ratio of total monthly debt payments (housing expense, 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.

Maximum VA Loan Amounts (Orange & LA County, CA)

  • 2 Units – $800,775
  • 3 Units – $967,950
  • 4 Units – $1,202,925

Use of Rental Income to Qualify

  • 75% of lease rental agreement 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.  Even though you can only use 75% of the gross rents as qualifying income, the actual gross income is 100% of rents collected.

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 3.5% down payment is crazy not to consider.  At the time of this writing, you can expect to see interest rates under 4% that can cover all of your closing costs with both FHA and VA financing.

If 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 positive start.

About Your Expert

Scott Schang

As a 19 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

Leave a Question or Comment About this Topic

  • 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 🙂

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