Have you ever dreamed of becoming a landlord and letting tenants help pay your mortgage? If so, you’re not alone – many first-time homebuyers are intrigued by the idea of buying a duplex with an FHA loan.
The Federal Housing Administration (FHA) is a government agency that provides mortgage insurance on loans made by approved lenders. FHA loans allow buyers to purchase a home with a low down payment of just 3.5%. Even better, FHA guidelines let you buy a duplex, triplex or fourplex while only living in one unit yourself!
Let’s explore how you can become a savvy real estate investor and purchase a duplex using an FHA loan.
An Introduction to FHA Loans and Duplex Properties
First, a quick FHA loan overview. These government-backed mortgages are ideal for first-time buyers and folks with lower credit scores or incomes. You only need a 580 FICO score to qualify for the best terms. FHA loans feature low down payments and flexible credit guidelines. Over 1 million FHA loans are issued every year!
Now, what exactly is a duplex? A duplex is a residential structure divided into two separate units. Each unit has its own entrance, kitchen, bedrooms and bathrooms. Think of a duplex as two homes fused together into one building.
The great thing about FHA loans? You can buy a duplex and live in one half while renting the other half out. Having a tenant helps cover your monthly mortgage payment. This makes homeownership more affordable. Let’s dive into the financing options and requirements…
FHA Financing Options for Purchasing a Duplex
You have two main choices when using an FHA loan to buy a duplex – either a purchase mortgage or a refinance. Each has its own pros and cons.
FHA Purchase Loans
The most popular option is the FHA 203(b) purchase loan. This program lets you buy a primary residence duplex with just a 3.5% down payment if your credit score is 580 or above. With a score of 500-579, the down payment rises to 10%.
The current FHA conforming loan limit for a duplex is $970,800 in high cost areas, and $420,680 in lower cost areas. Your duplex purchase price must fall at or below these limits.
A huge bonus is that FHA guidelines let you use 75% of expected rental income to qualify for your purchase loan. This allows you to buy a more expensive duplex by counting potential rents towards your income.
For example, if your duplex unit rents for $2,000 per month, you can claim $1,500 in rental income on your loan application. This increases your buying power significantly!
FHA Refinance Loans
Once you’ve purchased your duplex, FHA refinancing is available later down the road. Top options are the FHA Streamline Refinance and Cash-Out Refinance.
The Streamline Refinance lets you refinance into a new loan at today’s lower interest rates without any appraisal. You can lower your monthly payment by refinancing your existing FHA mortgage into a new one.
Meanwhile, a Cash-Out Refinance lets you tap into your duplex’s equity by refinancing for more than what you currently owe. You can withdraw the cash difference to use for any purpose. Both refis allow rental income to help you qualify.
Requirements and Eligibility for FHA Duplex Loans
While getting an FHA duplex loan is easier than conventional financing, you still need to meet certain requirements:
To qualify for the best terms, you’ll need a minimum credit score of 580 and a debt-to-income ratio below 55%. First-time homebuyers are welcome, but you must plan to use one unit of the duplex as your primary residence. Income documentation and asset verification are required.
The duplex itself must meet FHA safety and quality standards. It needs to appraise at or above the purchase price and pass an FHA appraisal and home inspection.
At least 51% of the duplex’s square footage must be residential living space. The rest can be commercial area. Both units must be completely separate and legal.
You’ll need to occupy one unit of the duplex as your primary residence for at least 1 year after closing. This owner-occupancy is key for FHA approval.
When underwriting an FHA duplex loan, lenders will review your income, assets, debts, and credit history. Expected rental income from the other unit can count towards your qualifying income, as mentioned earlier.
Mortgage insurance premiums of 0.85% – 1.05% of the loan amount are required on all FHA loans. Your loan officer will walk through all the details and paperwork.
Step-By-Step Process for Getting an FHA Duplex Loan
If you decide an FHA-financed duplex is right for you, here is a general timeline of what to expect:
Finding an FHA Lender
You’ll need to locate a lender that offers FHA loans. Credit unions, community banks, mortgage companies and online lenders are all options. Be sure to find an experienced FHA lender.
Completing Your Application
Your lender will have you fill out a loan application and submit documents like tax returns, pay stubs, and bank statements to verify your finances. A credit check will also be run.
It takes about 2-4 weeks for underwriting and approval once a complete application is submitted. You cannot lock your interest rate until approved.
Closing on Your FHA Loan
Expect 30-60 days from rate lock to closing. You’ll finalize the purchase price and schedule inspections during this period. At closing, you’ll sign mortgage documents and pay your down payment plus closing costs.
Then you get the keys and can move into your new duplex! Don’t forget to change the locks after the previous owners move out.
Unique Scenarios and Alternatives to a Standard Duplex FHA Loan
Beyond a basic FHA duplex purchase, here are some special cases and variations:
FHA 203(k) Rehab Loan Program
If your duplex needs extensive repairs or renovations, check out the FHA 203(k) rehab loan. It lets you roll rehab costs into the mortgage instead of paying cash. You can finance up to $35,000 in upgrades. Cosmetic improvements, room additions, new HVAC and plumbing – it’s all eligible for 203(k) funds.
Buying Just One Side of a Duplex
Technically, the FHA requires the entire duplex structure be financed together on one loan. But in some cases, half-duplexes are legally separate properties with their own parcel and deed. This allows you to obtain individual FHA financing on just one side. Make sure to review the legal zoning and ownership details with your real estate agent.
Selling After Meeting FHA Minimums
FHA requires one year of owner-occupancy, as your duplex is considered your primary residence. But after living there 12 months, you may sell or move out if choosing to. Review capital gains tax impacts if you sell in under 2 years. Consult a tax expert for guidance on timing the sale and avoiding capital gains.
The Bottom Line – Is an FHA Loan Right for Your Duplex Purchase?
FHA loans provide a flexible, low-downpayment path to buying a duplex, triplex or fourplex. You can live in one unit while collecting rent from the other units to help cover your mortgage. Just be sure you can handle the responsibilities of being a landlord!
Carefully crunch the numbers and evaluate both the rewards and headaches that come with managing rental units. Create a budget accounting for maintenance, repairs, insurance and occasional vacancies too. Don’t bite off more than you can chew!
Yes, you absolutely can buy a duplex with an FHA loan if you meet eligibility requirements. Just make sure you go in with eyes wide open. Chat with a qualified loan officer to discuss your specific scenario before committing. Best of luck finding your perfect FHA-financed duplex or multi-family property!