2-4 unit mortgages are perceived differently by lenders than mortgages against detached single-family houses.
Though some lenders consider 2-unit property loans to be no riskier than loans against a detached single-family house, many think they are riskier.
All think loans against 3 and 4-unit properties are riskier than those against detached single-family houses.
When they think a loan is riskier, they impose more restrictions and want to make more money on the loan, so they want more down payment, want borrowers to have a couple of (or many) months of reserves.
Add into the mix a first-time home buyer or make the property an investment and the perceived risk goes even higher, so do the restrictions.
Except in the case of investment properties, none of the above means that borrowers who could qualify for a detached single-family home cannot get a mortgage to buy a 2-4 unit property.
They can because the Government, through its HUD, VA and USDA Departments has been reducing the risk on lenders by offering insurance or guarantees.
The rules of borrowing under the programs created by these Departments are looser, too. For instance, borrowers can get 100% LTV VA mortgages, they can have no credit scores under FHA’s rules, etc.
Mixed-use properties are commercial properties. Many borrowers do not think of them as such and run into trouble getting a mortgage.
There are conventional conforming or government-backed mortgage loans available. But with more restrictions than many borrowers seem to realize.
Fannie Mae, for instance, will only lend against 2-unit mixed-use properties where the front unit is a store, the back unit is residential and the residential is accessible from inside the store (has no front entrance). (Or the first floor is commercial and the 2nd is residential and accessible from inside the commercial space).
In addition, the business run in the front must be owned by the borrower.
FHA on the other hand, lends against 2-4 unit mixed-use properties, but the commercial space must be less than 50% of the building and it gives value only to the residential part.
If a property has 4 units, each worth $100,000, and 3 are residential, the FHA will lend only against the 3 residential units. The maximum loan amount possible is 96.5% of $300,000 (289,500).
Notice that a commercial lender will lend against $400,000 but will want an LTV of 65%-75% (usually under 70%) and it will have higher interest rates. 70% of $400,000 is $280,000. So, if you plan to move into the mixed-unit property, an FHA loan can still be a better choice.
The VA, depending on how many veteran or active duty borrowers there are will lend against mixed-use properties with more than 4-units (each borrower after the 1st is allowed an additional unit). Like the VA it’s got the primary residence restriction.