An FHA loan for mixed-use property owners is possible, for some properties. Actually, there are three FHA loan programs that allow mixed-use properties as collateral.
I am about to cover what these programs are and the things to look out for but first I must disclose this: To keep the lights on, Home Loan Mine uses affiliate links. A large numbers of the links on this site are such links. If you buy (or register) for something through one of those links, I make a small commission. With luck, enough to feed my imaginary capuchin monkey pet for a week.
FHA Loan Programs for Mixed-Use Properties – Brief Overview
There are 4 loan programs the FHA has that can be used to purchase or refinance a 2-4 unit mixed-use property. I do not cover the basics of qualifying for an FHA mortgage; only the things that are different when you’re dealing with mixed-use properties.
1. Basic Home Mortgage Loan 203(b)
2. A Rehabilitation Mortgage 203(k) Standard
This is the full 203(k), the one you can do anything as long as you keep the original foundation structure. (If you want to build a brand new building, you’d have to get an FHA construction loan.
2. B Rehabilitation Mortgage 203(k) Limited
With this variation of the 203K loan program, repairs are limited to $35,000 and do cannot involve any structural changes.
3. HECM’s (Home Equity Conversion Mortgages, AKA Reverse Mortgages)
These are mortgages for people who are at least 62 years old. Borrowers are not require that mortgage payments are made.
FHA Loans and Mixed-Use Properties
So, what’s different about FHA loans for mixed-use properties?
If you want an FHA loan to buy or refinance a mixed-use property, you must meet FHA’s rules that apply to all property types:
- You must occupy one of the units as your primary residence
- The property must be safe and structurally sound
- You must meet the income and credit requirements, etc.
What you have to look out for with mixed-use properties is the residential percentage use of the property. No matter how many units you have, 2,3, or 4, at least minimum of 51 percent of the entire building square footage is for residential use.
You should also only consider mixed-use properties where the commercial usage does not have a negative effect on the residential usage.
For 3 and 4-unit buildings that are 3 or 4 stories high, that is not a problem. It is often a problem for 2-unti properties.
If the first and second floors are identical (perimeter), the FHA will not insure against the property.
Often, the commercial unit has the entrance moved back a few feet. If that brings down the commercial space to 49% or less, the FHA will insure against that property.
Sometimes, there’s a an addition to the side of the commercial space only, for storage. That kills the deal.
Mixed-Use Properties and Appraisers
Some appraisers are less conscientious than others. If you do not pay attention, some of them will draw lazy sketches.
By that, I mean they do not bother to include separate the rear entrance stairs to the residential unit. Even if they are dealing with stairs that are enclosed and finished to the same level as the front stairs. Or to remove the space the front stairs to the residential unit from the residential space. And you end up with a lender looking at a sketch where both the residential unit and the commercial use 50% of the building each, when, in real life, the commercial space takes up only 47% or 48% of the building.
Reverse Mortgages on Mixed-use Properties
This one is simple, you can get a reverse mortgage only on a 2-unit property and you cannot own more than one other property.
3 And 4-Unit Mixed-Use Properties and FHA Loans
When insuring a 3 or 4-unit property, the FHA wants them to pay for themselves. It requires, in other words, that they meet its self-sufficiency rule.
The self-sufficiency rules says that if all units were rented at market level, 75% of the rents must cover PITI. PITI stands for principal, interest, mortgage insurance, property insurance and property taxes.
If you have a 4 2-bedroom units in your building with a market rent of , say, $1,000/unit, then your principal, interest, mortgage insurance, property insurance, property taxes cannot be higher than $3,000.
FHA Mixed-Use Property Refinancing
The FHA loans are for residential properties. The FHA would like the loan to be based only on the value of the residential part of the mixed-use property.
In real life, I’ve seen that rule enforced when it comes to refinancing, I have not seen it when it comes to purchases.
You may have a 3-unit property that you purchased for $487,000 last year and you’ve made improvements but the appraiser comes in with a value of $320,000. That happens because the lender instructed to only consider the value of the residential units. And there is nothing you can do about that.
Well, not with that lender. You could try to find one that does not go by that rule.
Yes, there an FHA loan for mixed-use property owners is possible, under some circumstance. And, if you pay attention to the items mentioned above, you should not have a harder time than getting an FHA loan for any other type of property.