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Millenials Buying FHA Units as First Home

Millennials Buying FHA Units as First Home

Primary Residence Units

Millennials have figured out a little used, but very smart strategy for jumping into real estate with both feet.

This demographic doesn’t always seem get a fair shake as a stereotype, and I’ve experienced another side.  A really smart side.

I have met many, forward thinking minds that have come from this group and have the vision to see the incredible opportunity of buying a multi family as their first home.

Primary residence units are essentially when you buy a home that you intend to live in, making it owner occupied, that is 2 to 4 family units.

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For properly zoned multi-family units, smart millennials have figured out that you can use rents from the other units as qualifying income.

This deep understanding of the guidelines is giving these millennials a real head start on investing, and building long term wealth by investing in real estate.

I’m just saying that I’m impressed with the interest I’ve seen by this group toward buying primary residence units.

As my nod to this generation, I would like to share this knowledge with the people, so that all who have ears will hear, and benefit from this incredibly smart real estate investment strategy.

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Can I Afford Multi-Family?

I’m sure you’re already thinking it….wouldn’t a 2-4 unit property cost more than a single family home?  You’re smart to ask this question, and the answer is obviously “yes”.

This is where the magic of buying primary residence units comes in.  You can use 75% of the projected (or actual) rents from any unit that you’re not living in as qualifying income for the higher purchase price.

I have personally helped a young man buy a 3 unit property, when it would have been difficult for him to find anything in the price range he qualified for without the rents from his non-owner occupied units.

Not only are you able to use future rents to qualify, at the end of the day, your “out of pocket” mortgage payment will be much less than if you purchased a single family home.

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In some cases, you can actually make money with rents and have 100% of your home paid for by your tenants!

Down Payment Requirements

If you are buying a multi-family home and not living in one of the units, you will be required to come in with a minimum of 25% down payment.

When buying primary residence units, there are homebuyer programs that require very little, if anything as a down payment.  These guidelines will vary based on the type of financing you’re applying for.

Your credit scores and debt to income ratios may also influence which type of home loan options are available to you.

Let’s quickly examine the special loan programs that allow less than 25% down payment when buying primary residence units.

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FHA Financing – 3.5% Down Payment

FHA is probably the most flexible, and most accessible of all of your low down payment options.

Not only does FHA allow higher debt to income ratios, Government insured financing also offers the lowest down payment of all of the options available for buying a primary residence between 2 and 4 units.

Here are some of the highlights of FHA financing for primary residence units:

  • No first time buyer requirement / Must be owner occupied
  • 3.5% Minimum down payment
  • 3-4 Units must cashflow PITI payment
  • Must be 100 miles from any other owned properties
  • FHA Loan limits determined by County
  • Can use 75% of rents from non-owner occupied units as qualifying income

Freddie Mac Home Possible – 5% Down Payment

Freddie Mac offers an automated underwriting system (AUS) that is a direct competitor of Fannie Mae.  Both Fannie Mae and Freddie Mac are considered Conventional loan options.

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There are subtle differences between these two sister programs, one the least known benefits of using a Freddie Mac underwriting is the ability to buy up to 4 units with a 5% down payment using Freddie Mac Home Possible.

Here are some of the highlights of Freddie Mac Home Possible for primary residence units:

  • No first time buyer requirement / Must be owner occupied
  • 5% Minimum down payment
  • Income limits based on census tract – check here
  • Conventional loan limited to $424,100
  • Can use 75% of rents from non-owner occupied units as qualifying income

Fannie Mae HomeReady – 15% to 15% Down Payment

Fannie Mae is is much more conservative when it comes to 2 or more units using their community lending programs.

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Here are some of the highlights of Fannie Mae HomeReady for primary residence units:

  • No first time buyer requirement / Must be owner occupied
  • 2 Units require 15% down payment
  • 3-4 Units require 25% down payment
  • Income limits based on census tract – check here
  • Conventional loan limited to $424,100
  • Can use 75% of rents from non-owner occupied units as qualifying income

VA Guaranteed Mortgage – No Down Payment

If you are eligible for your VA home loan benefit, consider buying multi unit properties that you can call home and collect rents on.

Unlike FHA or Conventional loans, the loan limits do not increase if you are buying 2-4 units versus buying a single unit property.

If you find a home that the price exceeds the 100% financing loan limit, the Veteran must come up with 25% of the difference between the sales price, and the 100% financing loan limit.

Here are some of the highlights of VA Guaranteed financing for primary residence units:

  • No first time buyer requirement / Must be owner occupied
  • No down payment required
  • No income limits
  • 100% financing loan limit by State
  • Can use 75% of rents from non-owner occupied units as qualifying income

How Long Do I Have to Live There?

Am I reading your mind?  I get it, you feel like you’re renting because you’ve got neighbors next door still.  The money is nice, but it’s still not my “dream home”.  Sound familiar?  Of course it does.

You must live in this home for a minimum of 12 months.  As soon as you move out of the multi-family home, it is now non-owner occupied, and will follow slightly more conservative underwriting guidelines should you take out future loans.

FHA currently has a restriction that requires you to be 100 miles away from any other home you own in order to use FHA financing.  This means that you’re looking at a 5% down Conventional loan for your next home.

 

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

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