Lisa Prevost, writing for The New York Times, said this all so well I just wanted to share her article. This is great info -- and it may just tip you toward buying this charming duplex in the Historic District of Wilmington NC.
413 Church St., Wilmington NC$249,000MLS# 529904Video - 413 Church
REAL ESTATE
For buyers willing to take on the role of landlord, multifamily properties can be one of the more affordable ways into pricey housing markets.
On both conventional Fannie May loans and loans backed by the Federal Housing Administration, a portion of the anticipated rental income can be added onto the borrower’s income at application, “which helps people qualify for more house than they normally would,” said John Prom, a branch manager for HomeBridge Financial Services in Manhattan, which does a high volume of multifamily loans in the other boroughs.
The loans are available for owner-occupied properties with two, three or four units. Properties larger than that would require a commercial loan.
Seventy-five percent of the estimated market rent to be generated from the property, as determined by an appraiser, is added to the borrower’s income, Mr. Prom said. His typical clients for these loans are first-time buyers and midlevel earners, like police officers and teachers.
“They live in one unit for a while, and when the property goes up in value down the road, they sell and move, or rent out their unit and buy something else,” he said.
On F.H.A. loans, borrowers can put as little as 3.5 percent down, but on three- and four-families, the loan must be “self-sufficient.” This means that the adjusted rent total must be enough on its own to cover the monthly mortgage, including principal, interest, taxes and insurance, said John Walsh, the president of Total Mortgage Services of Milford, Conn.
The minimum down payment on conventional loans is usually 15 percent for two-unit properties, and 25 percent for those with three or four units, he said.
Freddie Mac’s "Home Possible"program does allow lower down payments of 5 percent on a duplex and 10 percent on three- and four-families for income-qualified borrowers, Mr. Walsh said. Borrowers’ income may not exceed 100 percent of the area median income.
Mr. Walsh emphasized that many lenders place overlays, or additional restrictions, on multifamily loans that make it harder for first-time buyers to qualify. Some won’t add rental income onto the borrower’s qualifying income if the rental units are vacant or the buyer has no experience as a landlord, he said.
“It has lightened up a lot as the market has improved, but there are still a lot of lenders who have these overlays,” he said. He suggested that buyers who are turned down by one lender try again with ones that specialize in these loans.
The reserve requirements are higher on multifamily loans, said Michael McHugh, the senior vice president for retail lending at Freedom Mortgage in Melville, N.Y. Lenders may require that the borrower have as much as six months’ worth of mortgage payments in the bank, depending on how much money the buyer is putting down and other factors affecting the riskiness of the loan.
Interest rates are fairly consistent with single-family loans, typically around an eighth of a point higher on a three- or four-family, he said. The conventional loan limits on multifamily properties vary by geographical region. In the metropolitan New York area, the limits are $800,775 for a duplex; $967,950 for a three-family; and $1,202,925 for a four-family.
While multifamilies can be a good entry point for first-time buyers, Mr. McHugh cautioned that buyers without landlord experience should think twice before taking on a property with three or four units.
“The rental market is not that easy,” he said. “Sometimes being a landlord is not all that it’s cracked up to be, speaking from personal experience.”
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