Use FHA Financing to buy a Duplex

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Duplex Investing using FHA Financing

FHA government loan programs can help you purchase a duplex property with a low down payment, even if you have less than great credit.

If you are willing to occupy part of a duplex or similar small, multi-unit property, you can obtain a Federal Housing Administration insured loan for as little as 3.5% down. FHA loans are suitable for borrowers with lower credit scores, and people just beginning to build their real estate investment portfolio.

How to get started? Here's an example: Nancy bought a Wheat Ridge duplex, putting just 3.5% down. She moved into one side of the duplex and leased out the other side. Her rental income covered $1,290 of the $1,750 mortgage. Nancy rented out one of the rooms in on her side to a roommate who paid her $550 in rent and utilities.

Nancy wasn't just living mortgage free, she was also getting started as a real estate investor. In February of this year, Nancy moved out and leased the side she had been occupying for $1,350 and began receiving $2,640 per month in rental income against her $1,750 per month mortgage. Not a bad positive cash flow for a property she had purchased less than two years ago!

In addition to receiving almost $900 a month positive cash flow, she gets tax write-offs, her mortgage is getting paid and she benefits from future property value appreciation. 

Nancy's initial duplex investment started with the utilizing a Federal Housing Administration's mortgage program. FHA will make multi-unit loans to borrowers with far lower down payments than almost all other loan programs except VA. If Nancy was limited to a conventional multi-unit mortgage, she would needed 25% of the purchase price for the down payment.

In addition to lower down payments, the FHA will lend to borrowers with less than perfect credit. FHA requires a down payment of just 3.5% for owner-occupied properties with credit scores down to 580. With 10% down, FHA will insure loans for borrowers with credit scores as low as 500. Conventional mortgage lenders typically require a minimum score of 620 along with much larger down payments.

FHA will will also let borrowers include projected rental income on mortgage applications. This means the future income from the rental can help a borrower qualify for the property. When applying for conventional financing, rental income may not be used to qualify.

However, using an FHA loan to purchase a Duplex has some stipulations. First, it is only for owner-occupant buyers. Borrowers must move into the property within 60 days and live there at least one year.

Another drawback is that FHA requires mortgage insurance when lending more than 80% of property value. Mortgage insurance will include an upfront payment equal to 1.75% of the loan plus monthly premiums of $200 on average for the life of the loan. These added costs can significantly affect the economics of a duplex or other small, multi-unit property investment.

FHA duplex financing makes sense for those new to real estate investing because it provides a great opportunity for buyers that have a lot of money saved up to start investing. It also gives them an investment experience with less risk because they have less of their own money invested.