Wait, I can buy a duplex for only 3.5% down?

P.S. The average duplex in Pierce County sold for only $380,000 in the past year.

  • 2 min read
  • February 28, 2020

Most home buyers think of property investment and owner occupying as entirely different things – either you buy a place to live in, or you buy a place to make money. Not both.

But why not both?

Multi-family properties with up to four units are still considered “residential” for mortgage purposes. This means that you can actually use one of the most helpful tools available in housing to buy one: the FHA home loan.

Buying with FHA financing means you only pay a 3.5% down payment to buy the property. The minimum credit score requirement for FHA is only 580. Importantly, you are required to live in the property as your primary residence for at least one year after you buy it, and move in no more than 60 days after closing. It really is a great tool, and it makes home ownership available to millions of people who otherwise couldn’t enjoy the opportunity.

And you can use it to buy multi-family properties too.

Let’s say you want to buy a duplex. One unit is vacant (the one you will move into), and the other unit is rented out. You would pay a normal 3.5% down payment. However, you can also count the rental income from the other unit as “your” income, for the purpose of making your mortgage financing work.

Lenders use a formula called the “debt to income ratio,” which is basically how much you pay in debt payments like mortgage, student loans, credit cards, auto loans, etc. you pay, vs. how much income you take in. It’s how your lender figures out whether or not you will be able to sustainably make mortgage payments into the future. By counting the income from the other unit as “yours,” you might be able to make a purchase pencil out that otherwise wouldn’t. And even if the other unit is vacant, no problem! Your lender can just estimate the market rent and credit you for 75% of it.

Besides being a great tool for adventurous investors who want to build a property portfolio (and don’t mind all the moving), FHA multi-family purchases can be a great tool for first-time buyers too. The median price for Pierce County duplexes in the past year was only $380,000. Your path to home ownership could very well be having a renter paying part of your mortgage for you!

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