In a lending market that requires an investor to put 25 percent down on a four unit property, and an owner occupant just 3.5 percent on the same building, it would seem happy days are here again for live-in landlords.
After all, don’t more units always mean more money?
In this case, yes. And yes.
It seems the FHAdoesn’t want any one of us to have too much fun. So, they’ve imposed something of a curfew on the triplex and fourplex market.
Before they’ll even think about giving you a loan, they want to know the net rental income of the property is greater than or equal to the monthly payment. In addition to the mortgage itself, the monthly payment also includes property taxes and insurance.
And with property taxes being based on the artificially high values of a few years ago, that’s tough to do.
What’s the net income? Well, that’s 75 percent of the rent collected from the three units you don’t intend to live in. In other words, the property has to be able to pay for itself with 75 percent of the revenue collected from just 75 percent of the units.
Before FHA will insure your loan, they also have one more rule they don’t ask of Minneapolis duplex buyers. They want to see that you have three months of reserves in your bank account.
Reserves? Yes, three months worth of mortgage payments, sitting in your account, just in case. And you have to be able to prove it’s your money, not a gift from mom and dad.
On a $350,000 mortgage with the minimum 3.5 percent down at 5 percent interest and amortized over 30 years, that’s $5439.35. Plus three months of property taxes, which could be $2000 or more additional dollars. Of course, you’ll still need your down payment of $12,250 and possibly 3.5 percent for closing costs.
On a similarly priced duplex, you’d need just the down payment and the closing costs.
So let’s say you won the lottery and have all that cash just sitting around. The building meets all of the other FHA party permit criteria. Woo hoo! Right?
Yes, but remember, if you choose to sell the property down the road and FHA’s standards remain the same, you will have fewer potential buyers. Why? Fewer buyers will have the larger down payment.