FHA Loan For Mixed-Use Property Owners: Pitfalls

972
FHA Loan For Mixed-Use Property Owners

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)

Like its name says, its the basic variety, the one most people think of when they think FHA loans.

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)

the joy of FHA for mixed-use property

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.

An FHA Loan For Mixed-Use Property-Owners
An FHA Loan For Mixed-Use Property-Owners

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.

Conclusion

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.

2 COMMENTS

  1. Was recently denied by a national reverse mortgage company for two reasons. One, related to mixed use, makes little sense: It’s because, of all things, my commercial space is being used as, well, a commercial space (a small professional office that represents about 30% of total floor space). They made that determination based on “their guidelines,” though not sure if that means their own internal guidelines or if it is a misconstruance of the FHA guidelines.
    The second reason, related to the property’s Legal Non-Conforming designation, is more understandable. The predominantly residential property is located in what’s currently a commercial/retail zone, but was built at a time when the zoning was residential — so consequently it was grandfathered in with LNC status as a residence. Their concern is that the property would lose its LNC standing in the event that there was significant residential damage (amounting to 75% of more of the residential value) — even though the county planning department has issued a letter that officially confirms that the residential portion could be fully rebuilt with an approved minor use permit. The sticking point here is the minor use permit. The underwriters point out that there is no guarantee if would be approved. Good point, and one I could accept, but what would be the odds, and what other facts or facets might be worth considering? Even though the planning supervisor encouraged them to share any concerns or questions with her, they did not seem to find it worth a phone call to check out the validity of their concerns.

    • The FHA requires that the residential part of the business be 51% or more and that the commercial use not interfere with the residential use.

      Lenders do not have to go with that. They can add restrictions, called overlays.

      So, just because the FHA does not object to something does not mean that a particular lender will not.

      The best way is to approach brokers, give them the part of the zoning rules regarding rebuilding, and have them approach their lenders, maybe one of them does not mind the minor use permit requirement.

LEAVE A REPLY

Please enter your comment!
Please enter your name here