Does the amount of your down payment alone determine the type of financing you use to buy a duplex?
Yes and no.
Traditionally, buyers who intend to owner occupy a duplex and have saved a small down payment use FHA financing. These loans require a minimum down payment of 3.5 percent and also have a lower minimum credit score threshold.
In exchange for these compromises in lending standards, FHA insures the loan for the lender; at a cost to the borrower.
To qualify for a conventional loan, on the other hand, an owner occupant typically must have at least 20 percent to put down on the purchase, and a higher credit score. As a result of having more “skin in the game” in the form of that higher down payment, the borrower typically isn’t required to carry mortgage insurance.
Over the weekend, I encountered a first time home buyer who had some confusion about this. His belief was that if he put more than 3.5 percent down on an FHA loan– 10 percent, for example, it would become conventional financing. Where he was confused is that a higher down payment may or may not require him to carry FHA mortgage insurance – but not turn an FHA loan into a conventional loan.
Remember, if you are an owner occupant, you can use FHA financing to purchase a duplex, triplex or fourplex as your principal residence. It’s a great way to to become an investor, and to leverage your money for its highest possible return.