An FHA loan is an exceptional way to become a homeowner with limited income or bad credit. Almost everyone can get accepted for this mortgage type.
This begs the question, can you buy a duplex on an FHA loan?
If you meet the loan’s eligibility criteria, you can purchase any property of under four units, including a duplex. Though, your new duplex must be your primary residence, not an investment.
In this article, we’ll tell you everything about FHA loans and guide you through getting a loan for a duplex. Let’s dive in!
What Is an FHA Loan?
An FHA (Federal Housing Administration) loan is a home mortgage designed for low to moderate-income families and first-time homeowners. Most banks and lending agencies offer an FHA loan that the government approves.
Since FHA borrowers are riskier than conventional borrowers, an FHA loan has higher interest rates. FHA loans also require PMI (Private Mortgage Insurance).
Additionally, the properties you can get an FHA loan for can be somewhat limited compared to other conventional loans.
However, there are numerous benefits to getting an FHA loan. First, you don’t need to save up for a hefty down payment. Secondly, you can get this loan even with a low credit score.
For example, if you have a credit score as low as 500, you can still get approved for an FHA loan that covers 90% of the home value. Accordingly, you’ll only need to pay 10% as a down payment.
Getting an FHA loan is relatively easy. Yet, to make the process simpler, you can check the home unit beforehand, and your real estate agent can help you with the loan procedure!
That said, all mortgages have requirements, including an FHA mortgage. Typically, FHA loans require the following:
- FICO® score of at least 500 = 10% down payment
- FICO® score of 580 and above = 3.5% down payment
- Mortgage Insurance Premium
- A debt-to-income ratio of less than 43%
- The unit must be the borrower’s primary residence
- A steady income
- Proof of employment
Can You Buy a Duplex on an FHA Loan?
You can buy any type of property with an FHA loan, as long as you meet the eligibility criteria. Your duplex must meet the FHA loan limit, which is about $604,400 and $1,394,775 for low-cost and high-cost areas, respectively.
You can’t go wrong with a duplex, whether you’re single, have a family, a first-time homeowner, or a landlord.
Though a duplex might be more expensive than an apartment, FHA loans don’t require the borrower to pay the down payment themselves. So, you can ask a relative for help with the down payment, or check down payment assistance programs.
Unlike apartments, duplexes are large enough for families, or if you enjoy having a lot of space. Furthermore, you can generate additional income by renting out the other unit!
Can You Rent a Duplex on an FHA Loan?
FHA loans don’t permit investment. Accordingly, you can’t purchase a property on an FHA loan with the purpose of renting out.
Luckily, there’s a way around this. Buying a duplex on an FHA loan allows you to become both a homeowner and a landlord!
That’s because the mortgage permits you to live in one unit while renting the other.
Not only can this be a perfect investment opportunity, but you can also increase your income to pay off the loan.
To explain, all mortgages require a minimum monthly income. So, you can use the projected rental revenue to increase your overall income, helping you qualify for the loan!
How to Buy a Duplex on an FHA Loan
It’s pretty straightforward to get qualified for an FHA loan. If you have no idea where to start, this step-by-step guide will help you prepare:
1. Assess Your Eligibility
Before attempting to get a loan, you must first understand the eligibility criteria. After all, you don’t want to get your hopes up only to get rejected for a mortgage.
For starters, you can check your credit score for free via AnnualCreditReport.com. Then, you should get proof of employment from your employer.
As for proving you have a steady income, you might either use your pay stubs, tax returns, or bank statements.
2. Find the Property
If you pass the eligibility criteria for the mortgage, it’s time to find your new home. When looking for a duplex, it’s best to work with a real estate agent.
You might think you’re saving some money by buying a duplex that’s FSBO (For Sale By Owner). Yet, real estate agents make for a much smoother process, especially when you’re applying for a mortgage.
Here are all the different ways real estate agents can be helpful when getting a mortgage:
- They can find the perfect property for you based on your needs, whether you want a spacious home or want to rent out the extra unit.
- They provide you with all the necessary information, helping you with the paperwork.
- They can suggest lenders based on your particular situation, further guiding you through the mortgage process.
3. Choose a Lender
Finding an FHA lender is simple. The hard part is getting the best price and deciding on which FHA loan to get. Each lender has a different mortgage rate and terms.
It’s best to gauge the market by getting quotes from different banks and mortgage brokers. To get a rate, the lender has to check your credit score. Typically, this can lower your score.
However, if you apply for a mortgage within 45 days, the multiple credit checks will be read as a single inquiry.
You can choose between the following types of FHA mortgages:
- Traditional mortgage
- Home equity conversion mortgage
- 203(k) mortgage program
- Energy-efficient mortgage program
- Section 245 (a) loan
4. Prepare the Necessary Documents
Once you’ve decided on a lender, you should submit your application as soon as possible. This way, you don’t risk losing the property to another buyer.
Usually, your mortgage will either get approved or rejected within 30 to 45 days.
Here are all the documents that most lenders will need:
- Your full name
- Your social security number
- A copy of state-approved ID, such as a driver’s license
- Income information
- Proof of employment
- Price of the property
- Down payment price
- Address of the property
5. Buy the Duplex
After, hopefully, getting your mortgage, it’s time for the duplex to become officially yours.
First, you should carefully check the mortgage offer. It’ll include the loan amount, the interest rate, and other conditions.
Then, all you have to do is sign the offer and return it to the lender. Your mortgage solicitor will take it from here. After anywhere from a month to three months, you’ll be able to move into your new home!
Frequently Asked Questions
Can you buy a duplex with an FHA loan?
You can get an FHA loan to buy up to four units. There aren’t any rules specifying the type of property you can buy. This means you can purchase a duplex too.
The main thing you need to understand when getting an FHA mortgage is that you must live in the mortgaged duplex. Still, a duplex allows you to be both a landlord and a homeowner, as there’s no rule against letting the extra unit.
Obtaining your FHA loan is a simple process. Your real estate agent can even guide you through it. As long as you have a stable job and an acceptable credit score of over 500, you can get a mortgage.