Introduction

Real estate investment can be a lucrative endeavor, but the hefty down payment required to purchase a multi-unit property can be a significant barrier for many aspiring investors. However, there are various low down payment options available that can help you break into the world of multi-unit property ownership.

Conventional Loans

NEW UPDATE ON CONVENTIONAL LOANS: As of November 2023

As of 11/18/23, Fannie Mae will allow down payments as low as 5% for 2-4 unit properties where the borrower will live there as their primary residence. This is a huge drop compared to the previous down payment requirements as listed in the table below.

Transaction Type	Number of Units	Previous Down Payment	New Down Payment
Primary Residence
Purchase	1 Unit	3.00%	3.00%
	2 Units	15.00%	5.00%
	3-4 Units	25.00%*	5.00%
Rate Refinance	1 Unit	3.00%	3.00%
	2 Units	15.00%	5.00%
	3-4 Units	25.00%*	5.00%

* Freddie Mac allows 20% down payment.

This drop in down payment will vastly increase the accessibility of multi-unit properties to borrowers with lower down payments including first time homebuyers.

Benefits:

1. Flexible credit & debt requirements: Borrowers with a slightly lower credit score and slightly higher debt ratios may still qualify. In many cases, a borrower will qualify for a conventional loan but not an FHA loan.
2. Higher loan amounts: Loan amounts for conventional loans are the highest of any loan product.
3. Inexpensive private mortgage insurance (PMI): There is no upfront PMI for conventional loans and the monthly PMI will reflect the borrower’s good credit.
4. More lenient property requirements: Conventional appraisals have fewer restrictions than FHA or VA appraisals. Many appraisers do not have issues with in-law or nonconforming units.
5. No Self-sufficiency test: For 3-4 unit properties, FHA requires a self-sufficiency test that may make many properties ineligible to purchase. This is not a requirement for conventional loans.

Considerations:

1. Private mortgage insurance (PMI): If your down payment is less than 20%, you will likely need to pay for PMI until you reach a certain equity threshold.
2. Higher rates: Interest rates for conventional loans may be higher than VA or FHA loans. Please consult your Lakeside Bank mortgage loan consultant to get a rate quote.

FHA Loans

Federal Housing Administration (FHA) loans are a popular choice for investors looking to buy multi-unit properties with a low down payment. These government-backed loans offer down payment requirements as low as 3.5% of the purchase price. Here’s why FHA loans are a viable option:

Benefits:

1. Low down payment: The minimum down payment of 3.5% makes it more accessible for first-time investors to get into the real estate market.
2. Competitive interest rates: FHA loans typically offer competitive interest rates, making them an attractive financing option.
3. Easier qualification: FHA loans have more lenient credit score requirements compared to conventional loans, making them accessible to a wider range of borrowers.

Considerations:

1. Mortgage insurance: FHA loans require borrowers to pay mortgage insurance premiums (MIP), which can increase the overall cost of the loan including a high upfront mortgage insurance premium.
2. Property requirements: The property must meet certain FHA standards, including minimum property condition requirements. This can make FHA appraisals a bit more difficult than an appraisal for a conventional loan.
3. Lower loan amounts: The maximum loan amount for FHA loans can be considerably smaller than the loan limits for conventional and VA loans.
4. Self-sufficiency test: For 3-4 unit properties, FHA requires a self-sufficiency test that may make many properties ineligible to purchase, particularly if there are renters in the building who have lived there along time. Speak to your Lakeside Bank mortgage loan consultant to get more information.

VA Loans (For Eligible Veterans)

If you’re a qualifying veteran or active-duty service member, the Department of Veterans Affairs (VA) offers VA loans, which require no down payment for multi-unit properties. Here’s why VA loans are an excellent option for eligible individuals:

Benefits:

1. No down payment: VA loans provide 100% financing, eliminating the need for a down payment.
2. Competitive interest rates: VA loans often come with favorable interest rates.
3. No private mortgage insurance (PMI): VA loans do not require PMI, reducing monthly expenses.

Considerations:

1. Eligibility: VA loans are exclusively available to qualifying veterans, active-duty service members, and certain members of the National Guard and Reserves.
2. Funding fee: While there’s no down payment, VA loans may have a one-time funding fee, which can vary based on factors like your service history and the size of your down payment. The Funding fee is usually financed in the loan amount and not paid for in cash.
3. Property requirements: The property must meet certain FHA standards, including minimum property condition requirements. This can make FHA appraisals a bit more difficult than an appraisal for a conventional loan.

House Hacking

House hacking is a creative real estate investment strategy that allows you to live in one of the units of your multi-unit property while renting out the others. This can significantly reduce your upfront costs and make it easier to qualify for a mortgage loan with a low down payment. Here’s how it works:

• By living in one of the units, you may qualify for an owner-occupied mortgage with a lower down payment requirement and lower interest rate.
• The rental income from the other units can help offset your housing expenses. The renter pays some or all your mortgage.
• Choose a property that is suitable for house hacking, with multiple units or the potential to create separate living spaces.
• As the landlord, you’ll be responsible for managing the rental units, which can be time-consuming and costly.

Conclusion

Purchasing a multi-unit property with a low down payment is possible through various financing options. Depending on your eligibility, financial situation, and investment goals, you can choose from conventional loans, FHA loans and VA loans (for eligible veterans) with low down payment options. Each option comes with its own set of benefits and considerations, so it’s crucial to carefully evaluate your choices and work with a knowledgeable lender or real estate professional to find the best solution for your real estate investment journey. With the right approach and financing in place, you can start building wealth through multi-unit property ownership, even with a limited down payment.