Financing a duplex: how to get a loan for a multi-family property

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Investing in real estate can be daunting. The right property isn’t always easy to find, and financing can be just as difficult. For first-time investors, one solution can help reduce the hassle: buying a duplex.

As the owner of a duplex, you can live in the property while renting out the remaining space. And since you’ll be using it as your primary residence, it might be easier to get financing.

Here’s what you need to know about financing a duplex:

What is a duplex?

A duplex is a property divided into two separate living areas. It’s basically like having two houses on one property. Each living space has its own entrance, and some even come with separate garages and outdoor spaces.

A duplex is different from a twin house, which consists of two houses and two lots, and are considered two different properties. With a duplex, a mortgage covers both units.

What is a multi-family house?

A multi-family home is basically a property that has different units that families can live in. The term is generally used to describe a property of two to four units. Duplexes are a type of multi-family house.

The case for living in a duplex

When you buy a duplex, you can become an owner-occupier, living on one side of the property and renting out the other. This has some advantages:

  • Easier to finance: Living in a duplex can prove to be a simpler investment for new real estate investors. This is because it is generally easier to obtain financing for owner-occupied properties than for non-owner-occupied properties. investment properties.
  • The other unit helps pay off your mortgage: Depending on the rental market in your area, the rent paid by your tenants in the second unit may cover your entire mortgage payment. At the very least, that will help with a significant part of it.
  • A single shared wall: If you like a certain degree of privacy, you only have to share one wall when you get a duplex.
  • Possibility to start generating rental income: Your duplex can be a way to start generating income. Once the second unit generates cash, you could potentially move out of the duplex and get a tenant to replace you. With the extra money, you can consider buying another property.

The rationale for investing in a duplex

Rather than living in the duplex, you could get a multi-family mortgage and rent both sides of the duplex. Some of the benefits of financing a duplex this way include:

  • More rental income: By renting both sides of the duplex, you will likely get more rental income, which will provide you with more cash flow.
  • Avoid living next to your tenants: If you don’t want to be bothered by tenants, renting from both sides allows you to skip the hassle. Your tenants are less likely to come see you since you won’t be living next door. They can contact you during normal business hours if there is a problem.

How to finance a duplex or a multi-family home

Financing a duplex you plan to live in is usually easier than one you don’t live in. If you do not plan to live in the unit, it is generally considered investment property, so you will need to find a larger down payment and meet other lender requirements.

For properties occupied by their owner

In general, the process of financing an owner-occupied duplex is quite similar to obtaining a mortgage for a single-family home.

Depending on the type of mortgage you get, you will need to meet the following down payment requirements for an owner-occupied duplex:

Conventional loan FHA loan Virginia
Min. advance payment 15% 3.5% 0%
Closing costs Yes Yes Yes
Mortgage insurance Yes1 Yes No
1If the deposit is less than 20%

Conventional loan

You can use a conventional loan like a multi-family mortgage. These loans are subject to certain limits. Compliant loan limits are set each year by county. They are the same in most areas except those where the costs are high. In most places, the loan limits are:

  • Single parent family: $ 548,250
  • Duplex: $ 702,000
  • Triplex: $ 848,500
  • Quadruple: $ 1,054,500

If you live in a high cost area, you can check with Fannie Mae or Freddie Mac what the limit is in your area.

Good to know: The requirements for conventional mortgage loans are more stringent than the requirements for government guaranteed loans. For example, you will need a higher credit score to take out a conventional loan.

You’ll also need to pay the PMI if your down payment is less than 20%, although it can usually be waived once you’ve built up enough equity.

Credible can help you find a good mortgage rate on a conventional loan. You can easily compare all of our partner lenders and see prequalified rates in as little as three minutes. Checking rates is always free and will not affect your credit score.

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FHA loan

With an FHA loan, you will have to meet compliant loan limits, but you may not have the same strict credit requirements as with a conventional loan.

FHA loans come with a relatively small down payment of 3.5%. However, you will pay mortgage insurance premiums over the life of the loan if your down payment is less than 10%. If you put more than 10% down, your mortgage insurance will be canceled after 11 years.

VA loan

For those who qualify, a VA loan can be a good choice when financing a duplex. You don’t have to deposit anything and there is no obligation to pay mortgage insurance.

However, the VA imposes an upfront financing fee – between 1.4% and 3.6% of the loan, depending on your down payment and whether or not you are using a VA loan for the first time.

For investment properties

If you don’t live in your duplex, the situation changes. You’ll need a larger down payment – for conventional loans, the minimum is 25% – and the lender may want to see other documents, such as local rental rates and occupancy statistics, which indicate that the property will be profitable.

No government guaranteed mortgages

Government-backed programs such as FHA loans and VA loans require that you live in the property as your primary residence. If you do not plan to live in the duplex, you will not be able to access these programs.

Higher down payment requirements

Lenders require larger down payments when you are not using a property as your primary residence. This is, in part, because PMI is not available for investment property.

Use rental income to benefit from a duplex loan

It is possible to use the projected rental income when applying for a multi-family mortgage, even as a first-time buyer.

The appraiser will include a special form called a Small Income Residential Property Appraisal Report (Form 1025) with your appraisal report that takes into account a number of different things, including:

  • What each unit is likely to bring for rent
  • The condition of the property
  • The value of comparable rental properties in your area
  • Neighborhood characteristics

Once done, Fannie Mae lets you “count” 75% of the market rent when you qualify for a loan.

So let’s say your monthly mortgage payment for a duplex is $ 1,500, and you plan to live on one side while renting the other side for $ 1,200, market rent.

You can use $ 900 – 75% of market rent – to reduce the amount of debt taken into account when calculating your debt-to-income ratio (DTI).

Now instead of a $ 1,500 debt payment impacting your DTI, only $ 600 is considered part of your DTI, which can help you stay below the 50% DTI limit .

About the Author

Miranda Marquit

Miranda Marquit is an authority on mortgage, investment and business matters and a contributor to Credible. His work has been published on NPR, Marketwatch, FOX Business, The Hill, US News & World Report, Forbes, etc.

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