Buying Investment Property With FHA Financing

It seems that very few realtors know that FHA financing can be used to purchase up to 4 units. Owner occupancy is required but the buyer can still buy the property with as little as a 3.5% down payment. Financing one and two units the minimum down payment is always 3.5%. With three and four units the loan amount is determined by the debt service.


When a buyer wants to purchase three or four units utilizing FHA financing the property must be self-sufficient. The maximum loan amount is limited so that the ratio of the monthly mortgage payment, divided by the monthly net rental income, does not exceed 100%. The buyer must have three months total payment in reserves and the reserves cannot be a gift.


Here is an example of how a buyer can purchase four units with FHA financing when the debt service is 100%.


Let's say your buyer want to buy four units for $650,000. A 3.5% down payment is $22,750 making the loan amount $627,500. This is fine as long as the net rental income from all four units can cover the total monthly payment, even though rent will be received only on three of the units because the buyer will occupy one.


At 5.00% interest rate the mortgage payment is $3,426. The mortgage insurance is $287. The taxes are $595 and insurance $100 totaling $4,408, PITI. Let's assume the average rent of each unit is $1,470 making the average net rental income from each unit $1,102. ($1,470 x.75% = $1,102) 25% is for the vacancy factor. Since $1,102 x 4 = $4,408 or 100% of the PITI then the buyer will need to have only 3.5% down payment and finance $627,500.


For qualifying the net rental income on three units is treated as income and is not subtracted from the mortgage payment. Since the PITI is $4,408 and FHA qualifies at a 45% ratio then the gross income to qualify is $9,795. ($4,408 / .45% = $9,795) Subtracting the net rental income of the three units from the gross income needed to qualify is what the buyer needs to make on a monthly basis assuming no additional debt. ($9,795 - $3,306 = $6,489) This is equivalent to an annual income of $77,868 the buyer should make to purchase the four units in this example.


Please don't hesitate to contact me with any additional questions you may have

Tim Lorenz

Instant MLS Listings & Free Market Analysis

"We have actually closed many short sales!"

http://www.markandtim.com/

949-282-2521