If you’re thinking of investing in rental housing, an FHA multifamily loan may be able to help you do it. These can be used to build, buy, or rehabilitate a property, and they come with low, fixed interest rates and long loan terms (up to 40 years).
Want to know if an FHA multifamily is the right move for your next real estate investment property? This guide can help.
Types of FHA multifamily loans
There are two types of FHA/HUD multifamily loans you can use as a rental property investor: 221(d)(4) loans and 207/223(f) loans.
The 221(d)(4) loan is designed for constructing new rental or co-op housing or financing substantial rehab costs on a rental property that already exists. The 223(f) loan can only be used to purchase or refinance existing rentals.
In both cases, the property must have at least five units in order to qualify. If you’re looking to purchase a rental property smaller than this, you’ll need to use a traditional FHA loan and live in one of the units. (These are only available to owner-occupants who use the property as their primary residence.)
The 223(f) loans tend to be more popular in recent years. In 2019, the FHA insured $4.9 million in 221(d)(4) loans and $5.6 million in 223 loans. In 2018, it was $6.3 million and $8 million, respectively.
How much can you borrow with a HUD multifamily loan?
FHA loan limits depend on which loan program you’re using. With 223(f) loans, the maximum loan size ranges from 83.3% to 90% of the property’s value, depending on the type of tenants you’ll be targeting. On 221(d)(4) loans, the loan limit is 90% of the property’s estimated replacement cost.
Qualifying for FHA multifamily loans
The qualifications vary by loan product, too. Take a look at the requirements you’ll need to meet for each loan program below.
221(d)(4) loan requirements
- The property must be aimed at moderate-income families, the elderly, or the handicapped.
- No more than 10% of the floor space can be dedicated to commercial use (this goes up to 20% if it’s a substantial rehabilitation).
- Units must be single occupancy only and have access to a kitchen and bathroom.
- You must be partnered with a nonprofit organization or public agency.
- You must make a down payment of 10%.
223(f) loan requirements
- All units must have complete kitchens and baths.
- No units can require substantial repairs (minor, noncritical ones are allowed and must be completed within one year of closing).
- Units must have been completed or substantially rehabilitated at least three years ago.
- You must make a down payment of 10% to 17%, depending on the property’s value.
Pros and cons of FHA loans for multifamily investors
FHA multifamily loans are certainly an option for real estate investors, but they’re not without fault. Before you opt to use one for your next investment, consider these pros and cons.
- Interest rates are low, especially when compared to other options, like hard money loans
- You only need a 10% down payment in some cases, much lower than other investor-focused loans
- Payments can be spread over 35 to 40 years, safeguarding your monthly cash flow
- You can use the loans to build, buy, rehab, or refinance — whichever fits your goals
- You may need to market toward certain types of tenants
- You could pay more in interest (due to very long loan terms)
- The funding process can be very lengthy, delaying your project
- You’ll need to pay for mortgage insurance, both upfront and monthly
- There are limitations to how much commercial space your building can have, limiting your income
Where to get an FHA multifamily loan
The FHA doesn’t issue loans directly. Instead, they provide mortgage insurance, reducing the risk for the lenders who issue these loans.
Because of this, you’ll have to get your FHA multifamily mortgage from an approved FHA lender. If you’re looking for faster loan processing, a lender approved to do Multifamily Accelerated Processing is your best bet. The FHA has a list of those here.
If you’re unsure where to get your loan or just want more information about multifamily financing in your area, contact the nearest HUD Multifamily Regional Center.
The bottom line on FHA financing
FHA mortgage loans can be a good financing option if you’re building, buying, or refinancing a multifamily property with at least five units. They’re not your only option, though, so make sure to shop around, compare interest rate quotes, and consider other financing routes -- like a conventional loan, for example.
For expert guidance, you might also want to talk with a mortgage broker. They can point you toward the most affordable financing option for your goals.