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How to Buy a Duplex with FHA Loan

Purchasing a small multi-unit rental property such as a duplex can be an excellent strategy to grow a real estate portfolio with robust cash flow. With every property, you can obtain two tenants and two rental income sources! Sounds amazing, right? Although investing in small multifamily rental property has benefits, it also entails some risks. This article covers all the essential information about how to buy a duplex with FHA, even if it is your initial investment.

What is a duplex?

A duplex is a residential property consisting of two separate units, each with its entrance. These units are typically adjacent to each other, sharing a common wall, or stacked one on top of the other with one unit on each floor. Duplexes commonly share a front and backyard, as well as a driveway for off-street parking.

Duplexes are an excellent option for anyone seeking to invest in multifamily property due to their unique configuration that allows two families to reside in a single building. Despite their small size, duplexes can provide significant rental income and are an excellent choice for first-time real estate investors entering the market.

Top benefits of buying a duplex with an FHA loan

Here are some benefits of buying a duplex with an FHA loan:

  • Lower down payment. FHA loans typically require a lower down payment compared to conventional loans, making it easier for first-time homebuyers and real estate investors to purchase a duplex.
  • Lower interest rates. FHA loans offer competitive interest rates, which can save you money over the life of your loan.
  • Duplex eligibility. FHA loans can be used to purchase a duplex, triplex, or fourplex, making them an excellent option for anyone looking to invest in multifamily properties.
  • Owner-occupancy requirement. FHA loans require the borrower to live in one of the units as their primary residence, which can help offset the cost of homeownership.

Buying a duplex with an FHA loan is an attractive option for first-time homebuyers and real estate investors looking to purchase a multifamily property.

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How to buy a duplex with an FHA loan

Down Payment of 3.5 percent

Do you wish your renters could make your mortgage payment for you each month? Have you considered making your first house an investment property as well?

The FHA permits you to purchase a duplex and live in one apartment while renting out the other. FHA also accepts three and four-unit homes, albeit the standards are slightly more stringent. We’ll go over it further afterward.

You can become a landlord if you acquire a multi-family property intending to reside in one of the units and fulfill basic FHA standards. According to FHA requirements, a 3.5 percent down payment is required.

Renting to Qualify

A lot of first-time homebuyers don’t really consider becoming landlords. One of the primary reasons you may not have thought of purchasing flats is that you believe it is too pricey. True, a two-family home seems to be more expensive than a single-family home, but only slightly.

Investors know that the first buyers may not understand that rental income can be used as qualifying income. According to FHA criteria, you can use 75% of the empty unit(s) rent as qualified income.

So here is an explanation of how this might work if you go for FHA financing to buy a duplex. This fictitious example demonstrates the possibility of using rental money to increase your affordability.

Property Type: Duplex with two units
The purchase price: $575,000
Monthly earnings: $5,500
$2,000 per month in rental income
Qualifying Rental Income: $1,500 multiplied by 75%
Your required minimum income: $4,000

By using 75% of the rental revenue from the second unit of your duplex, you instantly improve your income to qualify for the more considerable loan amount by 27%.

Purchasing a 3- to 4-Unit Property

While using FHA loans to purchase a three or four-unit property, the property must fulfill the self-sufficiency rental income calculation.

Self-Sufficiency in Net Terms The term “Rental Income” refers to the rental income generated by the subject property that is more than the principal, interest, taxes, and insurance (PITI).

The PITI divided by the monthly Net Self-Sufficiency Rental Income for three- to four-unit properties may not exceed 100 percent. Another way to look at it is that the total rentals earned by the property must be able to meet the PITI payment.

Net Self-Sufficiency Rental income is calculated by taking the Appraiser’s estimate of just rental price from all units, including the unit chosen for tenancy, and deducting the greater of the Appraiser’s estimate for vacancies and maintenance or 25% of the fair market rent.

When purchasing a three or four-unit property, additional reserves are required. You should have two months PITI in flexible reserves in addition to covering all down Payment and closing charges. This is not necessary when purchasing a two-unit duplex.

Work with a reputed mortgage company

If you’re told you can’t do something, it doesn’t always mean you don’t qualify. For example, qualifying for a house loan for hundreds of thousands of dollars is not just something a computer or machine can do. It might be very complicated and challenging for certain homebuyers.

So don’t be upset if a loan officer says “no.” They may have simply done you a favor. On the other hand, if the lender that rejects you down does not explain precisely why you do not qualify, it may simply mean that they even won’t like to try.

A competent loan officer will explain why you do not qualify today and what you would need to do in the future to qualify. A skilled loan officer will educate and empower you, allowing you to make better decisions.

Watch the video to learn more about how FHA loans work


If you’re interested in purchasing a duplex using an FHA loan, work with LBC Mortgage. We specialize in providing FHA loans for multifamily properties, including duplexes. With our expertise and years of experience, the LBC Mortgage team can guide you through the entire process of getting the right financing for your duplex purchase. 

Contact us today to learn more about how we can assist you in achieving your real estate goals.

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