Getting a Mortgage on a Multi-Family Property

Have you known someone who has bought a multi-family unit and then lived in part of it while renting out the rest? It’s pretty cool to have someone else paying part of your mortgage.

But getting a mortgage on a multi-family unit isn’t the same as getting a mortgage for a single-family home. These loans have different underwriting guidelines.

What is a Multi-Family Property?

First, let’s define what a multi-family home is. It’s multiple living units (as few as two) with separate entrances and exclusive living areas. Duplexes, triplexes, and fourplexes all fit this definition. (Properties with five or more units are considered commercial real estate, but properties with four or fewer are considered residential when it comes to financing.)

What is Your Goal?

If you’re buying an entire unit as an investment property, you don’t have nearly as many options as you do if the unit is partially occupied by the owner.

If it’s strictly an investment, you don’t have access to government-guaranteed loans like FHA and VA loans, which can make it easier for you to buy a multi-family property.

Additionally, you’ll need a higher down payment and will pay higher interest rates. For the remainder of this article, I’ll be talking about multi-unit loans where the owner is occupying one unit.

Down Payment

It depends on the loan program, but you’ll usually have to put more down for a multi-unit mortgage that you’d have to for a single-family home, which can require as little as 3% down.

Typical down payments for multi-unit conventional loans are:

Duplex, 15% of the purchase price

Triplex, 20% of the purchase price

Fourplex, 25% of the purchase price

If you qualify for an FHA or VA loan, you’re in luck with the down payment. FHA loans require just 3.5% down, while VA loans allow for 100% financing.

A side note: Freddie Mac’s Home Possible program does allow you to finance 1- to 4-unit properties with just 5% down, but it does have income limits.

Depending on the loan program, a parent or relative may be able to kickstart your investment by providing a percentage of the down payment funds.

Maximum Loan Limits

Another plus to getting a multi-family property is that you can get a more expensive property without heading into jumbo loan territory (which comes with higher interest rates). More units equals a higher lending limit.

In 2019, that limit is usually $484,460, but it goes higher with more units—up to $931,600 for four units. However, these numbers are higher for more expensive parts of the country.

Income—and Can You Use Rental Income to Qualify?

Obviously, you’ll need a higher income to qualify for a bigger loan. That begs the question: can your new rental income be used to help you qualify.

As usual, it depends. Guidelines vary, but typically you’ll need to have some sort of landlord experience under your belt. This shows us that you can consistently collect rent and find good tenants.

Even so, you can usually use only 75% of rental income as qualifying income (to account for maintenance and vacancies), and you’ll usually need to have signed leases in hand.

Interested in Purchasing a Multi-Family Unit?

Are you interested in purchasing a multi-family unit? It can be a smart investment strategy that will pay off for years to come. If you have any questions about what a mortgage might look like for you, give me a call! I’m here to help.

10 Steps for a Seamless Mortgage Application Process

Thinking about buying a home? Congratulations!

Buying a home is an exciting time in a person’s life, but if you aren’t prepared, setbacks may dampen your mood. Spending time preparing now can save you time and headaches after you’ve turned your application into the bank.

Here are 10 steps that will make the mortgage application process go more smoothly for you.

Check Your Credit Score

First, you need to check your credit score. This number will be your first introduction to any potential lender, and they’ll use it to glean a picture your overall financial health.

A bad credit score doesn’t necessarily mean you can’t get a mortgage, but it means that the terms of the loan probably won’t be as good as they would be if you had good credit. Bad credit scores mark potential borrowers as higher risk, and the borrowers could be forced to pay higher interest rates and larger down payments to compensate for that extra risk.

Don’t despair if your credit score isn’t where you want it to be. There are steps you can take to improve your credit score now, before you ever apply.

Avoid New Loans and Lines of Credit

A mortgage is a big loan, and lenders will probably want it to be one of the only ones you’ve applied for recently. Old loans won’t usually disqualify you, as long as you’re making your payments on time. A recent loan or new credit card, on the other hand, could look bad to potential lenders.

That’s in part because loan applications and hard inquiries on your credit can negatively impact your credit score. Those little dents aren’t usually a problem over time, because your score improves as you pay off those loans and as the hard inquiry on your credit falls off, but make sure you give yourself time to rehabilitate that score before applying for a mortgage.

Pay Off as Much Existing Debt as You Can

If you currently have lots of debt to your name, lenders won’t be eager to help you add debt to your financial profile. Even if you’re not drowning in debt, try to pay off as much of it as you can. Minimize your credit card bills and pump some money into any long-term loan debt you’re working on erasing. It shows lenders that you’re serious about paying off loans and that you can be trusted to stick to payment plans over a long period of time.

You’ll want to save money for down payments and closing costs, but using any extra cash to pay down debt will help spruce up your financial profile at a crucial point. This will also help improve your credit score, though there can be a delay between the debt payment and the credit score improvement.

Keep Credit Card Accounts Open

This one may seem counterintuitive at first. While you do want to pay off credit card debt, you don’t want to close credit card accounts altogether. When you close a credit card account, you lose that line of credit from your financial profile, and your credit score will usually sink.

The best way to use a credit card is to have as large of a line of credit as possible, use only a fraction of it, and pay off the debt quickly.

Pay Your Bills on Time

As you focus on reducing your existing debt, don’t let any extra debt pile up. Keeping up with your bills won’t help your credit score, but falling behind will hurt it. Showing lenders you can keep the lights on and the water running is an important step in getting them to trust that you can pay to keep a roof over your head, too.

Save Up Cash

Mortgages come with closing costs and down payments, so you’ll want to save up some cash. In the months before applying for a mortgage, try to bulk up your checking and savings accounts.

While you want to plenty of cash on hand, you want to avoid large deposits before applying for a mortgage. Lenders usually impose restrictions on cash gifts. Those restrictions may include providing an explanatory letter about where the large deposit came from and why. If a potential lender doesn’t know where an unexplained deposit comes from, they might decide to reject the application.

Keep Your Employment Steady

If finding a new job and buying a home are both on your to-do list, pick the home first. Lenders usually prefer applicants to demonstrate their ability to hold down jobs. There’s some leniency when it comes to getting a new position in the same career field, but in general, lenders will expect you to hold down the same job for a couple of years.

You should also try to avoid taking a leave of absence, even if you plan to return to the same job. A maternity absence usually shouldn’t disqualify borrowers from securing a mortgage, but other types of absences may.

Plan Your Budget

Before applying for a mortgage, take a hard look at your budget and figure out how your mortgage will fit into that. Many lenders want borrowers to spend no more than 28 percent of their paycheck on their mortgage. Borrowers might not want to, either.

Your debt-to-income ratio, or the amount of your income that goes toward paying off debt, should max out around 42 percent. If you can shoot for a lower ratio, that’s even better. Whatever your preferred debt level, the more your mortgage eats into that, the less you’ll have to put toward car payments, student loans, etc.

Gather Together the Documents You’ll Need

Mortgage applicants are required to provide quite a few supplemental documents. Among them, you can expect to turn over two years’ worth of tax returns, a month’s worth of pay stubs, and documents related to your rental history.

These documents back up your promise to repay the bank for the loan. It’s proof that you actually have the income and financial history that you claim.

Avoid Any Big Purchases

Once you’ve done everything else on this list, you’re ready to apply for a mortgage! Just make sure to hold off on any other major purchases, at least until after you’ve closed on your loan. Trust me that buying a brand-new car right before closing is not a good idea.

Applying for a mortgage isn’t easy, but it’s manageable. Once you’re done, you’ve taken a major step toward homeownership. If you have any questions about the application process, don’t hesitate to reach out or leave a comment below!

What to Expect for a Rental Property Down Payment

If you’ve got extra cash, you might consider investing that money in a rental property. Rentals can help diversify your investment portfolio and build financial stability. If you haven’t purchased a rental before, there are a few things you need to know about the down payment.

How Much You Can Expect to Put Down

Put simply, you can expect to pay more upfront for a rental property when compared to a standard home mortgage. Most rental property loans require a down payment of at least 15 percent. That’s the bare minimum, and that’s only for people with the best credit. The truth is, most people can expect a minimum down payment of more like 20—25 percent down.

You can also expect to pay more than you would for a typical home’s closing costs. Interest rates for a rental property loan will most likely be higher as well, since there’s more risk associated with a rental property investment.

How to Reduce Your Minimum Down Payment

If you want to minimize your down payment, consider a rental property with fewer units. The minimum down payment for a single-unit rental property mortgage can be as little as 15 percent. If you’re buying multiple rental units, that down payment minimum will rise as high as 25 percent.

Living in one of the property’s units will drastically expand your loan options, including options for lower down payments. You can find FHA loans that require as little as 3.5 percent down if you plan to live in the property. Living in the property may also help you qualify for down payment assistance.

Keep in Mind…

For many lenders, gifts won’t qualify as part of your down payment. That means your parents can’t help you put money down for your rental property purchase.

If you need a way to scrape up a little extra cash to meet the down payment requirements, home equity loans can count toward your down payment. If you’ve built up enough equity in the home you currently live in, you can borrow against that amount to help fund your down payment and closing costs.

This is a very basic overview of rental property down payments, but the down payment is just the beginning. If you have any questions about rental property down payments or what comes next, leave them in a comment below. And remember, I’m always here if you have any questions or are ready to get started.

Six Housing Market Trends for 2019

You may have seen headlines about the housing market slowing down, but what does that mean for you? Knowing what’s happening will ensure that you don’t miss the opportunity of your dreams.

There’s no crystal ball to look into, but it’s not hard to find trends already shaping the new year. We live in an interconnected world, and those news alerts on your phone will affect the housing market—even if they seem completely unrelated. Get ready for 2019 by reviewing six trends that experts think will move the housing market this year.

Interest Rate Hikes May Stall

Like any other industry, the health of the U.S. economy and stock market at large has a direct impact on the housing market. When the economy’s doing well, it can become easier to buy, sell, or get a loan for a home. Despite stock volatility at the end of 2018, the economy’s healthy by many key indicators.

When the economy is doing well, the Federal Reserve raises the benchmark interest rate, which indirectly increases interest rates across the board. That may seem counterproductive, and the stock market can react negatively to the increases, but the idea is to keep economic growth moving forward. For those looking at buying a home, it means new mortgages will get more expensive.

After several rate hikes in 2018, officials at the Federal Reserve now appear to be easing off rate hikes—at least in the immediate future. That’s good news for buyers. Last month, the Fed predicted two rate hikes in 2019, but more recently, the Fed’s former chair Janet Yellen said the Fed may not make those hikes after all.

Higher Mortgage Limits Could Increase Homebuying

Late last year, the Federal Housing Finance Agency decided to raise the maximum conforming loan limits in 2019—from $453,100 up to $484,350. Those limits are even higher if you’re buying in an expensive market, but the gist is that you can now get more money without having to get a jumbo loan, which makes life easier for both you and the bank.

Home Improvement Stores Should Grow

The easiest way to gauge nationwide housing market activity is right at your local strip mall. Stores like Home Depot and Lowe’s have become key indicators of all sorts of housing projects, since they’re popular with DIYers. When sales (and the companies’ stock prices) go up, it can mean more people are moving into homes and tweaking them to their tastes or launching remodeling projects that may increase their home’s value.

Construction stagnated in 2018, and Home Depot and Lowe’s ended the year on a lackluster financial note. But a CNN aggregation of expert opinions expects both Home Depot and Lowe’s stock to climb in 2019. That should help restore consumer confidence in the housing market as a whole.

As Interest Rates Rise, Home Equity Loans Could Spike

Instead of moving into a new home and getting a new mortgage, homeowners may decide to take out a home equity loan and renovate their current home instead. Those loans are borrowed against the value of your home. For example, if you’ve paid off $100,000 on your current mortgage, you can borrow some of that money—which may be used to remodel, redecorate, or whatever else you need cash for.

With interest rates trending upward, Mark Flemming, chief economist at First American, said he expects home equity loans to become more popular. That way, homeowners won’t lose the low interest rate they currently have on their mortgage. Experts at CoreLogic agreed, pointing out that people are staying in homes longer, which means those owners are gaining significant equity in many parts of the country.

Market Slowly Balancing Itself Out

One way to measure whether it’s a buyers’ market or a sellers’ market is months of supply. This is how long it would take, at the current selling pace, to sell all of the homes on the market. Six months’ worth of supply is considered a “balanced” market. Any less than that, and sellers reap benefits like high demand and quick sales. Any more, and buyers enjoy more options and more time to negotiate.

The U.S. supply is currently sitting just below four months, and that’s good news for sellers. If you’ve been following the housing market in recent years, this one’s nothing new. But the market has recently started creeping toward balance, and analysts expect that to continue in 2019, especially in markets that have been red-hot in recent years.

Home Construction Lull May Continue

2018 ended on a bad note for single-family home construction. Economists with the National Association of Home Builders (NAHB) blame the slowdown on a shortage of labor and a lack of lots to build on—in addition to governmental factors like regulations and new trade tariffs. A growing population depends on the construction of new homes, and when construction stalls (like it did toward the end of 2018), the market gets out of whack. This significantly impacts first-time homebuyers and lower-income families, whose price ranges can’t cover more lavish home purchases. NAHB expects construction stagnation to continue in 2019.

There’s also the impact of natural disasters to consider. Hurricanes and wildfires slow construction work and strain available labor. Where natural disasters strike, we can expect a construction lull to follow.

This is also bad news for home flippers. Put simply, there are less homes to flip. The outsized demand hikes prices for the homes that are available, which increases the risks of investment. Flippers and first-time buyers should keep tabs on construction activity, and single-family home construction in particular.

How are you feeling about 2019, and what trends will you be looking for? Which factors do you think will have the biggest impact on homebuyers and sellers? Share your thoughts in a comment below!

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