2 To 4 Unit Properties

Purchasing 2 To 4 Unit Properties

First time home buyers or home buyers who eventually want to become real estate investors can now purchase 2 to 4 unit properties as an owner occupied residence with a FHA Loan with 3.5% down payment. 2 to 4 unit properties can be great investments for home buyers intending on occupying one of the units and renting the other units to offset the monthly housing expenses. FHA does require that mortgage loan borrowers of 2 to 4 unit properties occupy one of the units for at least one year. After occupying one of the units for at least one year, the 2 to 4 unit property owner can then qualify for another owner occupied home and rent out the unit they are exiting.

FHA Loans And 2 To 4 Unit Properties

To qualify for 2 to 4 unit properties with a FHA Loan, the mortgage loan borrower needs at least a 580 FICO credit score. There is a 3.5% down payment requirement for mortgage loan borrowers with at least a 580 FICO credit score. Borrowers with credit scores under 580 FICO credit scores, a 10% down payment is required. Mortgage rates on 2 to 4 unit properties are higher than mortgage rates of single family homes because mortgage lenders view multi unit buildings as higher risk. With higher risk means higher mortgage rates. To get the best mortgage rates on 2 to 4 unit properties, one should have credit scores of at least 640 FICO. Mortgage lenders will require three months of reserves for three and four unit properties. Reserves are one month of principal, interest, taxes, and insurance or PITI. Many mortgage lenders require two years landlord experience from the mortgage loan borrower to be able to count potential rental income as part of their mortgage lender overlay. If a mortgage lender requests two years landlord experience in order for them to count potential rental income, the seek another mortgage lender where they have no mortgage lender overlays .

Using Potential Rental Income To Qualify

FHA allows up to 85% of the potential market rent income to qualify for the mortgage loan borrower’s income calculations. However, many FHA mortgage lenders have mortgage lender overlays where if the mortgage loan borrower does not have two years landlord experience, then the potential rental income cannot be used to qualify. If you are told that you do not qualify due to mortgage lender overlays because you do not have two years landlord experience, contact Gustan Cho Associates at 262-716-8151 or email Gustan Cho at GustanCho@Outlook.com.

Can I Qualify For 2 To 4 Unit Properties With Conventional Loans?

You can qualify for 2 to 4 unit properties with conventional loans, however, owner occupied 2 to 4 unit properties require 15% down payment with conventional loans. You can also use potential rental income but the potential rental income you can use is 75% of the potential market rent that is stated on the home appraisal.

What Is Debt To Income Ratio?

Debt To Income Ratio

Debt To Income Ratio is the sum of the minimum month debt payments a loan applicant has divided by the loan applicant’s monthly gross income. Mortgage lenders consider debt to income ratios one of the most important factors when qualifying for a mortgage loan. There are different debt to income ratio requirement depending on the mortgage loan program. For example, the maximum debt to income ratio permitted for FHA Loans is 56.9% if the mortgage loan applicant credit scores of at least 620 FICO or higher. If the mortgage loan borrower has credit scores of under 620 FICO credit scores, then the maximum debt to income ratios allowed is 43% debt to income ratio. For conventional loans, the maximum debt to income ratios allowed is 45% DTI. For jumbo loans, the maximum debt to income ratios allowed is normally 40% DTI.

What Is Front End Debt To Income Ratio?

The front end debt to income ratio is the monthly principal, interest, taxes, and insurance payments divided by the mortgage loan borrower’s gross monthly income. The front end debt to income ratios is also called the housing ratio because mortgage lenders consider the housing ratio or proposed housing ratios very important to see whether or not the mortgage loan borrower can afford the new proposed mortgage payment. FHA Loans has a front end debt to income ratio cap of 46.9% DTI for FHA mortgage loan borrowers with credit scores of 620 FICO or higher. For FHA mortgage loan borrowers with credit scores of under 620 FICO credit scores, the front end debt to income ratios gets reduced to 31% DTI.

What Is The Back End Debt To Income Ratio?

The back end debt to income ratio is the front end debt to income ratio plus all other minimum monthly debt obligations such as minimum credit card payments, auto loan payments, student loans, installment loans, and any other monthly debts such as child support payments, alimony payments, payment agreements divided by the mortgage loan borrower’s gross monthly income.

Solution To High Debt To Income Ratio Borrowers

Mortgage loan borrowers with high debt to income ratios often need to go with FHA Loans. FHA Loans are much more lenient with high debt to income ratios than conventional loans. Maximum debt to income ratios for conventional loan programs is capped at 45% where FHA Loans have debt to income ratio caps at 56.9%. FHA Loans also allow for non-occupant co-borrowers for FHA mortgage loan borrowers with high debt to income ratios. More than one non-occupant co-borrowers are permitted with FHA Loans. With conventional loans, Fannie Mae does not allow non-occupant co-borrowers, however, Freddie Mac does allow non-occupant co-borrowers. Again, both Fannie Mae and Freddie Mac have debt to income ratio caps of 45% DTI.