Purchasing a multifamily home can be a savvy way to generate passive income and build wealth. Multifamily mortgages are available for buyers of duplexes, as well as of three- and four-unit dwellings.

Multifamily homes with up to four units are considered residential for the purpose of financing. You can buy them with mortgages like those used to buy single-family homes. Multifamily properties with five or more units are commercial real estate. They are a different ballgame when it comes to financing. Loans for commercial real estate are generally more difficult to get, require bigger down payments, and often require shorter repayment schedules.

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Investor or owner-occupant

The options for financing multifamily homes depend on whether the buyer intends to occupy one of the units.

Owner-occupants can choose between the Federal Housing Administration (FHA) loans, Veterans Affairs loans, or conventional financing, but investors are limited to conventional mortgage loans.

Here’s a look at three options for multifamily mortgage loans for duplexes, triplexes and fourplexes.

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Conventional Mortgages for Duplex and Multifamily Homes

Conventional mortgages are suitable for:

• Owner-occupants

• Investors

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What’s the Maximum Mortgage Amount?

Conforming loan limits for conventional loans are generally $484,350 nationwide in 2019, with higher limits for counties with higher housing costs. If you’re buying a multifamily property, there are higher loan limits.

The maximum loan limits increase to $620,200 for two-unit homes, $749,650 for three-unit homes and $931,600 for four-unit properties, for most areas without a high housing cost add-on.

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Can You Use Rental Income to Qualify for a Loan?

Buyers of a duplex or multi-unit home can sometimes use the rental income from the additional units to qualify for a loan, but in general, the renters must have already signed a lease so that the rental payments can be verified.

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What Rental Income Can You Count?

Lenders can consider rental income from the multifamily property as long as you can provide appropriate documentation of the payments.

The property must be either a two- to four-unit residence that is owner-occupied, or a one- to four-unit investment property. That means if you’re going to live in one of the units, rent from the tenant-occupied units can help you qualify for a mortgage. If you’re an investor, you can count the rent from all units.

Not all the income applies though; typically 25 percent is subtracted to account for vacancies and maintenance.

You’ll need to provide documentation to show the income is stable. Acceptable proof could be a current lease, an agreement to lease, or at least two years’ worth of consistent rent history. 

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Investors Typically Need Higher Down Payments Than Owner-Occupants

Traditional mortgages require a down payment of 20 percent. Buyers can sometimes get mortgages with lower down payments, though they’ll have to pay for mortgage insurance, or PMI.

If you’re buying property as an investment, and will not occupy the property, you’ll have to meet different criteria to get a mortgage. PMI doesn’t cover investment properties, so you’ll have to put down at least 20 percent, or even more, to get traditional financing. Lenders assume on more risk with investment properties, so they might require 25 or 30 percent down, especially to qualify for better interest rates.

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FHA Loans for Financing Duplexes or Multi-Family Homes

If you plan to live in one unit of the multi-family property, you may be eligible to finance it through a Federal Housing Administration (FHA) loan. These loans are backed by the government and can be used for properties with up to four units.

FHA loans can be suitable for:

• First-time home buyers

• People with less-than-perfect credit

• Buyers who don’t have a large down payment

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