Why an FHA-Financed Duplex is an Ideal First Investment (2024)

FAQs

Is it a good idea to buy a duplex with an FHA loan? ›

FHA loans are one of the best ways for new buyers to purchase a duplex but are not the only option buyers have. If you have the ability to increase your down payment amount to 5% there are some conventional loan programs that might be worth exploring.

Investing in a duplex can be a good idea if you can pony up the cost and don't mind being a hands-on landlord. A key advantage is the ability to live in one of the units or rent both out.

Final answer: The greatest advantage of FHA financing is the potentially lower down payment requirement, often as low as 3.5%, compared to the minimum 5% for conventional loans, hence the correct option is B.

It cannot be used to finance a second home, a rental home, a vacation home, or an investment property. That said, there are some exceptions. You can use an FHA loan to purchase up to a four-unit dwelling, as long as you live in one unit as your primary residence. Then you can rent out the other units for income.

FHA loans are mortgages insured by the U.S. government's Federal Housing Administration. The insurance allows lenders to offer qualifying terms that are less strict than conventional mortgages. That means that homebuyers (particularly first-time buyers) can more easily qualify for a mortgage.

FHA mortgage insurance protects lenders against losses. If a property owner defaults on their mortgage, we'll pay a claim to the lender for the unpaid principal balance. Because lenders take on less risk, they are able to offer more mortgages to homebuyers.

FHA Self Sufficiency Test – FHA Rule 75

Next, you will have to determine the market rate rents that can or are already being charge for each apartment, including the one you intend on living in. The total of these rents multiplied by 75% must be greater than your monthly mortgage payment.

Single-family homes typically require less low maintenance and may have higher appreciation potential, while multi-family homes offer the advantage of multiple income streams. Condos, on the other hand, can potentially yield lower returns due to common fees, but they often require less maintenance from the investor.

A duplex can be evaluated in the same way that investors value apartment buildings. The rental income and expenses for both rental units should be combined to determine the Net Operating Income (NOI). Investors can then apply an appropriate cap rate to the NOI to arrive at a valuation.

What are the benefits of an FHA? ›

An FHA loan may be a better option if you have a lower credit score, a higher DTI ratio, or less money saved for a down payment. On the other hand, a conventional loan may work better if your finances are sound and you can qualify for favorable loan terms.

Among its many achievements, FHA modernized the American mortgage system, improved the quality of the nation's housing stock, prevented millions of Americans from losing their homes, allowed millions more to purchase their first home, and financed the construction of millions of modestly priced rental units.

More mortgage insurance paid: Because you are making a lower down payment, you will have to pay more private mortgage insurance (PMI) to make up the difference. With FHA loans, you also have to pay an upfront mortgage insurance fee.

Yes. Providing that you used the FHA Mortgage to purchase your primary residence, and provided you then moved into the primary residence and lived there for a reasonable amount of time. The amount of time would be a matter of opinion, but at least one year would likely be considered reasonable.

You can also use FHA loans to buy an investment or rental property. There are two important restrictions to understand, however. The first is that the property can have no more than four rental units total. The second is that you need to occupy one of the units in the property as your primary residence.

The greatest advantage of using FHA financing when purchasing a home that the buyer plans to occupy is the lower down payment requirement. This makes buying the property more affordable, especially for first-time homebuyers or those with limited funds.

Some reasons a seller might refuse an FHA loan include misconceptions about longer closing times, stricter property requirements, or the belief that FHA borrowers are riskier.

Lower Credit Score and Down Payment

Because an FHA loan is backed by the government, credit score and down payment requirements are lower than those of conventional loans. Buyers require a minimum of a 580 credit score and a down payment of 3.5% to qualify.

Why Do Some Sellers Not Accept FHA Loans? Some home sellers see an FHA loan as a “riskier” loan compared to a conventional loan because of the FHA loan's stricter appraisal requirements. Also, the loan's lenient financial requirements for borrowers may leave the seller with a negative perception.

What is the main goal of the FHA? ›

Federal Housing Administration (FHA), agency within the U.S. Department of Housing and Urban Development (HUD) that was established by the National Housing Act on June 27, 1934 to facilitate home financing, improve housing standards, and increase employment in the home-construction industry in the wake of the Great ...

Because FHA closing costs include the upfront MIP, an FHA loan can have average closing costs on the higher end of the typical 3% – 6% range. That doesn't diminish in any way the value of getting an FHA mortgage, with its low down payment, lower interest rates and flexible underwriting.

First, lenders tend to view multi family properties as being more risky than single family homes. This is because there is often more debt associated with these types of properties, and they can be more difficult to sell if something goes wrong. As a result, lenders charge higher interest rates to offset this risk.

Duplexes are versatile.

Another reason investors think buying a duplex is a good investment is the versatility of a two (or three) unit property. You have the option to rent one long-term and the other on a short-term basis. This can be especially lucrative if your duplex investment property is in a vacation location.

FHA loans allow lower credit scores and are easier to qualify for. Conventional loans allow lower down payments.