Why a Multi-Unit Property?
By purchasing a property with two or more units, you can utilize the rental income from one unit to help qualify for the loan. This makes the property more affordable and sets you up with an immediate revenue stream. It's important to note that while 2-4 unit properties are typically financed with residential mortgages, properties with 5+ units are considered commercial, which involves different financing rules.
Income and Employment Requirements
When purchasing your primary residence, lenders require proof of a steady income. Typically, you must show at least a two-year work history, ideally in the same job or field. This requirement ensures that you have a stable financial foundation to handle mortgage payments. There are some exceptions to this rule, but generally, the focus is on consistency, i.e. to have work history in the same industry, as one important example.
Comparing FHA and Conventional Loans
Both FHA and conventional loans offer pathways to homeownership with low down payment options, making them attractive for first-time buyers. Here's a detailed comparison:
Feature
FHA Loan
Conventional Loan
Down Payment
As low as 3.5%
Typically 3%-20%
Credit Score Requirement
Minimum 580 for 3.5% down payment; 500 with 10% down payment
Typically 620 or higher
Mortgage Insurance
Required for all loans, usually for the life of the loan
Required if down payment is less than 20%, can be canceled when equity reaches 20%
Loan Limits
Varies by region; generally lower than conventional loans
Higher limits, set by FHFA (Federal Housing Finance Agency)
Debt-to-Income Ratio (DTI)
Can be higher, up to 43%-50% in some cases
Typically should not exceed 45%
Property Condition
Property must meet strict appraisal standards
Fewer restrictions on property condition
Interest Rates
Generally lower interest rates
Interest rates depend on credit score and other factors
Seller Contributions
Up to 6% of the loan amount
Typically up to 3% of the loan amount
Loan Types
Fixed-rate and adjustable-rate mortgages are available
Fixed-rate, adjustable-rate, and other types available
Occupancy Requirement
Must be owner-occupied
Can be owner-occupied, second homes, or investment properties
Refinancing Options
Streamline refinancing available
A variety of refinancing options are available
Loan Assumability
Loans are assumable by a new buyer
Not typically assumable
Advantages of Starting with a Multi-Unit Property
Cost Control
Living in one unit and renting out the others allows you to offset your living expenses, making homeownership more affordable. This strategy helps control costs while you build equity in the property.
Building Equity and Experience
Owning a multi-unit property provides valuable real estate experience, both as a homeowner and a landlord. This can enhance your credibility with future lenders and provide capital for future investments. With time, as you gain more equity in the property, you can refinance and use the capital to purchase additional properties, expanding your real estate portfolio.
Financial Safety Net
Ensure you have 3-6 months of reserves to cover mortgage payments in case of vacancies or other financial difficulties. This safety net will help you manage risks and maintain financial stability.
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