Live Mortgage-Free With a Multi-Unit Home

Written by
David Mully
Read Time: 5 minutes

For potential real estate moguls, or at least anyone looking to get a start in real estate investing, becoming a landlord in your own home can be a good start. FHA loans and other home loans from mortgage lenders make it easier than you may think.

How? By buying a multi-unit dwelling, living in one and renting out the others.

Whether it’s through buying a duplex, a three- or four-unit dwelling, home buyers can find that a home is more affordable when you're both resident and landlord because your tenant(s) could be paying most — if not all — of the monthly mortgage payment.

“It’s a good way to get rental income for a property, along with living in the other unit,” says David Hosterman, branch manager at Castle & Cooke Mortgage in Greenwood Village, CO.

To get a mortgage for a residential multi-unit property, the dwelling must be four units or less. For more than four units, it’s considered a commercial property and so is the loan, says Elysia Stobbe, a mortgage originator and real estate investor. Most commercial loans are adjustable-rate mortgages, or ARMS, and don’t have the consistent monthly payments you get with a fixed-rate loan, Stobbe says.

Multi-unit FHA loan

A home loan insured by the Federal Housing Administration, or FHA, may be the easiest way for most people to buy rental property of four units or fewer. There are many criteria for these loans, with one of the main ones being that the borrower must live in one of the units on the property.

That can be a blessing or a curse, depending on your view of being a landlord and living next to your tenant. Living that close to someone who is paying you money could give you peace of mind, or it could be a hassle if something breaks and they alert you to it in the middle of the night.

If the home isn’t owner-occupied, then FHA won’t insure the loan, says Morgan Franklin, a real estate agent in Lexington, KY, who once owned a mortgage brokerage.

FHA loans require borrowers to pay for mortgage insurance, which protects the lender if the borrower defaults on the loan. All FHA loans require a down payment of just 3.5 percent, including multi-unit dwellings, which make them the most lenient type of loan for rental property, Hosterman says.

These loans are meant for a duplex of two to four units. Anything bigger than that and an investor would need a bigger down payment of at least 25 percent and would likely get a conventional loan, Franklin says.

But with an FHA loan, investors can live in their investment while using the income to pay the mortgage.

“It’s a great way to become a real estate investor,” Franklin says.

He uses his area, Lexington, KY, as an example of being able to live mortgage-free. A home that’s split in two as a duplex can be bought for a monthly mortgage of $1,200 and the owner can charge $1,500 per month in rent, Franklin says. That leaves $300 in income and a home that the owner has a tenant paying the mortgage.

Rental income requirements

Multi-unit home borrowers don’t have to make enough income on their own to qualify for such a home loan. Part of the projected rental income can help them qualify.

Because mortgage lenders want to make sure they get their money and that borrowers can afford the homes they’re buying, FHA and other loans for duplexes and other shared dwellings require proof of rental income.

The projected rental income will be added to an applicant’s income for qualifying purposes. But only 75 percent of the rental income will be used to help qualify for the loan, due to a 25 percent vacancy factor in rentals, Hosterman says. If the rent is $1,500, then 75 percent of that, or $1,125, would be the projected rental income.

The rental qualifying income is listed on the appraisal and is derived at not only by appraising the entire dwelling, but by pulling rental comps in the area for similar homes.

Some mortgage lenders require six months to two years of experience as a landlord, Franklin says.

Down payment guidelines for multi-unit homes

Conventional mortgages, which have lower fees than FHA loans and offer better mortgage insurance rates for loans with less than 20 percent down, can also be used to buy a multi-unit home.

If the buyer isn’t going to live in any of the units, then a 25 percent down payment will be needed, Hosterman says.

If they’re going to live in one unit, then a conventional loan will require 20 percent down for a duplex. That goes up to 25 percent for a triplex or four-unit dwelling, he says.

A standard Fannie Mae conforming loan requires 15 percent down paying for a two-unit property and 25 percent for three or four units, says Hillary Legrain, vice president at First Savings Mortgage Corp. in Bethesda, MD.

“However there are certain jumbo loan products that you can use even if the loan amount is a conforming loan amount that will allow lower down payment amounts,” Legrain says.

Her company has a jumbo adjustable rate mortgage that allows only 10 percent down with a loan of up to $900,000. It also has a jumbo fixed rate loan for 20 percent down for a three- or four-unit property, she says.

VA loans a possibility

For veterans who want to be landlords, a VA loan is a good option, says Chris Birk, director of education at Veterans United.

In addition to living in the multiunit property, veterans may need a history as a landlord to count rental income toward qualifying for the loan, Birk says. Some lenders may require a certain amount of cash reserves, he says.

However you decide to finance a home loan so you can become a landlord and hopefully earn enough rental income to pay your mortgage, you may want to take care of some of the hassles of being a landlord by hiring a property management firm. That way someone else can deal with the calls to fix the refrigerator while you rest quietly next door.

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