Mortgages for Mixed-Use Properties

Small mixed-use properties present a problem: owners (borrowers) tend to think of them as they think about small (2-4 unit) apartment buildings while lenders do not.

That means that owners expect to get lower interest rates and down payments than lenders are willing to give / allow.

Types of Mixed-Use Property Loans

If a mixed-use property has 2 commercial / industrial uses, lenders will only give commercial loans against it.

That means that the interest rate will be a bit higher than if one of the uses were residential and, often, that the appraisal required will be a commercial and, therefore, more expensive and, more importantly, the LTV will be lower.

Typically, commercial mortgages have LTV’s of 65% or lower while some residential mortgages have LTV’s as high as 96.5%, 97% or even 100%.

If one of the uses is residential, there are some residential loan programs, depending on how much (as a percentage of the property square feet) the residential use is and, for at least one loan, how the commercial and residential parts are connected.

If a property has 2 units, one residential in usage, the other commercial and if the residential unit is accessed from the commercial unit (think barber shop in the front, living quarters in the back), the property can have a conforming conventional loan (i.e., Fannie Mae will purchase the loan), if the owner lives and runs their own business out of the building.

If the property has 2 units, one residential in usage, the other commercial and the units have separate entrances (think barber shop on the first store, apartment on the 2nd), it is possible to get an FHA loan against the property, provided that the residential unit is at least 51% of the square footage of the building.

That excludes most 2-unit buildings as the 1st (commercial use) unit is either the same size as the 2nd or larger.

If the property has 3 units, one residential, the other two commercial, the FHA will insure a loan against it, as long as 51% of the square feet of the building is residential in nature and at least one of the borrowers will occupy one of the unit as their primary residence and as long as the rent from all 3 units (the lower of the market rent or actual rent for the units not occupied by a borrower and market rent for the one occupied for the borrower) cover the principal, interest, property taxes and property insurance payments.

Most 3-unit buildings are, in other words, good candidates for an FHA loan.

If the property has 4 units, it depends on the layout, first, as the residential usage must be 51% of the building; then on the relationship between rents and expenses (75% of rents from all units must cover all building expenses, as above).

That means that 4-level buildings are, usually, good candidates while 2-story buildings are not.

USDA and VA loans are also possible on small mixed-use properties, again, as long as the non-residential-use does not take too much space and as long as one of the borrowers uses one of the units as their primary residence.

In other words, it is not possible to purchase a small, mixed-use property as an investment and get residential property loan interest rates or the high LTV’s (low down payments) that residential properties get.

Mixed-Use Lenders / Loan Programs

We have already mentioned FHA, Fannie Mae, USDA and VA.  Freddie Mac is like Fannie Mae. 

Banks and credit unions have the above programs, usually all of them.  They tend to have lower interest rates than any other lender.

If a property owners’ banks do not lend to them, the next best option is mortgage brokers.  They work with wholesale lenders that tend to have higher interest rates for FHA, Fannie Mae, USDA and Va. 

Many have loan products for each program, some specialize in only one or two. Some have QM (Qualified-Mortgage) programs only, some have QM and Non-QM and some only have Non-QM.

The Non-QM products are for people who are self-employed and do not want to show their tax returns, W2’s and / or pay stubs.  People can qualify based on bank statements, cash flow from the subject property or some other easy-to-convert-into-cash asset (retirement account).  Or even only based on LTV and credit.

Yes, we are talking about no-income verification here.  These types of loans disappeared after the mortgage meltdown but they re-appeared towards the end of 2018.  Since the Dodd-Frank Act and the Ability-To-Repay Rules, they are only offered to investors.

(Seems like I am making a mistake in the previous paragraph regarding self-employed people with W2 income.  I am not, some people have both types.  As long as they have a way to prove 2 years of self-employment, they can purchase an investment property with what in the industry is called ‘lite doc.’)

Lite-doc loan programs from wholesale lenders have lower LTV’s and higher interest rates than conforming or government-backed loans. 

They are still a good option for many and better than hard money loans.