Buying Your First 4 Plex (Multifamily) With An FHA Loan

Buying your first 4 Plex can be an exciting and daunting task, especially if you are considering financing the purchase through an FHA loan. FHA loans are a popular option for first-time homebuyers as they offer more lenient credit and down payment requirements, making it easier to secure financing for a property. I’ve personally helped many people just like you get started in the path of wealth creation and passive income, it all starts with the first 4 plex. In this blog, we will guide you through the process of buying your first 4 Plex using FHA financing.

Step 1: Determine your eligibility

The first step to securing an FHA loan is to determine if you meet the eligibility requirements. As mentioned earlier, FHA loans have certain requirements, including a minimum credit score of 580, a steady source of income, and a debt-to-income ratio of below 43%. You will also need to have a down payment of at least 3.5% of the purchase price. It is essential to ensure that you meet these requirements before proceeding with the loan application.

Step 2: Research the market

Once you have determined your eligibility, you need to research the market to find a suitable 4 Plex that meets your budget and requirements. Los Angeles County is a vast area, and it is advisable to narrow down your search to specific neighborhoods that are within your price range. You should also consider the condition of the property, the vacancy rate, and the potential rental income. We here at Sage Real Estate specialize in the sale of 4 plex properties and we will definitely provide you the the blueprint to succeed.

Step 3: Find a lender

The next step is to find a lender that offers FHA loans. It is crucial to compare different lenders to find one that offers favorable terms, interest rates, and fees. You can start by researching online, but it is also advisable to get recommendations from friends or family members who have used FHA loans to finance their homes.

Make sure that the lender you plan to use understands FHA type loans specifically for multiunit properties such as 3 and 4 unit buildings. Most lenders without experience will not understand the self-sufficiency requirement but on the Federal Housing Administration has this as a mandatory requirement. Have the lender explain the self-sufficiency test, if they appear to be confused by this I strongly suggest you move-on. We do recommend you speak with out in house lender Sage Trust Mortgage and make sure you are getting the best rate. Check out Sage Trust Mortgage.

Step 4: Understand the self-sufficiency test

The FHA self-sufficiency requirement allows only 75% of the rental income to be used to cover the total monthly expenses. This means that the monthly rental income from the property must be 25% higher than the monthly operating expenses.

For example, if the monthly operating expenses of a property are $4,000, the monthly rental income should be at least $5,000 to meet the FHA self-sufficiency requirement. This is because only 75% of the $5,000 rental income ($3,750) can be used to cover the monthly operating expenses of $4,000.

The FHA sets this 75% requirement to make sure that the property has a cushion for unexpected expenses and to help ensure the long-term financial viability of the property. The self-sufficiency test only applies to three and four unit buildings. If you are buying a house or duplex this will not be a requirement. I know I know….lots to think about. Well we have you covered, we have created the first of its kind calculator that allows you to know immediately if the property you are looking at qualifies or not. Simply plug in the numbers in our FHA Calculator.

I must let you know that most properties in Southern California do not qualify for the self sufficiency test. The reason for this is that the ratio between prices and rents is simply too high. Another reason, is that sellers not wanting to go with an FHA buyer thinking that there is higher likely hood of not qualifying for the loan. We researched the past 10 years and found that out of 2% of 4 plex sales in the city of Long Beach received FHA financing. 5% of all triplex sales received FHA financing. Although the numbers look grim, I’m here to tell you that there is still a small chance. As, the market corrects itself I expect for sellers to consider FHA buyers.

Step 5: Get pre-approved

Getting pre-approved for an FHA loan is a crucial step in the homebuying process. It involves submitting an application to the lender, which includes providing documentation such as proof of income, employment history, and credit score. Pre-approval will give you an idea of the loan amount you qualify for, which can help you narrow down your search to properties within your budget.

Step 6: Make an offer

Once you have found a suitable 4 Plex and have been pre-approved for an FHA loan, the next step is to make an offer. This involves submitting a written offer to the seller, which includes the purchase price, terms, and conditions of the sale. You may need to negotiate with the seller to arrive at a price that works for both parties.

Step 7: Underwriting and closing

If the seller accepts your offer, the next step is underwriting and closing. Underwriting involves verifying your financial information and assessing the property’s value to determine if it meets FHA requirements. Once the loan is approved, you will need to sign the final paperwork and pay closing costs, which include appraisal fees, title search fees, and other expenses.

In conclusion, buying your first 4 Plex using FHA financing can be a complicated process. However, by following the steps outlined in this blog, you can increase your chances of securing an FHA loan and finding a suitable property that meets your budget and requirements. Remember to work with a reputable lender, get pre-approved, and thoroughly research the market before making an offer. Good luck with your 4 Plex purchase and onto the path of wealth creation.

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