How to buy multifamily property with no money down

Are you ready to start considering adding multifamily properties to your real estate investment portfolio? Wondering how to go about buying multifamily rental unit options?

Before you jump into the buying process, you’ll want to find out if you qualify for a mortgage on a multiunit property.

For a two to four-unit multifamily property of the type that you can get from many residential lenders, including Rocket Mortgage®, you need to take the following into consideration:

Down Payment

The first concern for aspiring real estate investors to be aware of are higher down payments for multifamily properties (compared to single-family homes). For instance: If you’re seeking to buy a two-unit primary residence as a start to multifamily real estate investing, you’ll need a minimum 15% down payment if you’re getting a conventional loan. However, if you’re considering investing in three- to four-unit primary properties as part of your multifamily real estate investing strategy, the minimum down payment is 20%.

Down payment requirements also differ on conventional loans for investment properties (such as multifamily properties that you are not living in) to boot. Case in point: There’s a 25% minimum down payment that you’ll need to consider when buying a multifamily home if you don’t plan on living in one of the units.

On the bright side, down payments for multifamily properties backed by an FHA loan are the same as they would be for a single-family home. You can buy a residence up to four units with a 3.5% down payment through Rocket Mortgage as long as you live in one of the units. While you can get an investment property through the FHA, Rocket Mortgage doesn’t offer this option if you don’t live in one of the units.

VA loans are offered as a real estate financing benefit for eligible veterans, active duty service members, reservists, and surviving spouses of those who passed away in the line of duty or as a result of a service-connected disability. Those who qualify can acquire a primary residence of up to four units without a down payment. Investment properties (that you don’t live in) aren’t eligible for VA loans.

Debt-To-Income Ratio (DTI)

If you’re contemplating buying a multifamily property and engaging in multifamily real estate investing, it’s important to consider your debt-to-income ratio (DTI) as well. Your DTI effectively represents the amount of monthly debt that you have in comparison to your gross monthly income. In other words, the less money that you’re paying out each month in debt and the more that’s coming in as income, the more attractive your DTI will look to lenders.

When considering whether to extend you a multifamily home mortgage, a lender will effectively take your income and cash flows into consideration – and take an even closer look at regular and recurring debts like car payments, student loans and mortgages. Minimum payments on revolving lines of credit like credit cards will also be considered. In effect, the lower your DTI, the better chance that you’ll have of being able to qualify for a multifamily property mortgage loan.

A good general guideline here if you wish to buy a multifamily home is to keep your overall DTI below 43%. However, the exact DTI requirements that you’ll need to meet will depend on the type of loan that you’re considering getting.

The two conventional investors, Fannie Mae and Freddie Mac, even have different policies surrounding DTI. For example: Fannie Mae says that you absolutely can’t spend more than 50% of your monthly income toward payment of debt. Meanwhile, Freddie Mac doesn’t set a hard and fast guideline. Instead, each case is looked at based on factors including median FICO® Score and the size of your down payment as well as other risk factors before determining the maximum acceptable DTI.

On the VA side, maximum DTI for a fixed-rate loan is 60%. However, additional qualifying factors need to be really strong if your DTI is above 45%. This includes having a FICO® Score with a median of at least 620. To qualify with a score between 580 and 620, you’ll need to maintain a housing expense ratio – your overall mortgage payment compared to your gross monthly income – of no higher than 38% and overall DTI of no more than 45%.

FHA requirements for scores between 580 and 620 are the same as VA requirements. If your credit score is 620 or higher, qualifying DTI is decided on a case-by-case basis, but in no event will it be higher than 67%.

When thinking of buying a multifamily home, one way to keep DTI in check is to use the rental income that you’re anticipating receiving from tenants in order to qualify for the mortgage payment. To do this, you’ll need a firm lease agreement in place with your anticipated multifamily tenants in order to use the income to qualify. For some loans, a special type of appraisal will need to be done that includes the approximate rental value of your space, factoring in its multiple rental units.

Another really important item to note here is that you can only use rental income to qualify for the purchase of a multifamily home after a vacancy factor (or vacancy rate) is applied. The vacancy factor accounts for the fact that if a tenant gives notice, you may have a period of time during which a rental unit is unoccupied while finding a new tenant. To compensate for this, you can only use 75% of your multifamily property rental unit income to qualify for the mortgage.

It’s also important to note that because the VA requires rental income to be reported on a tax return, you won’t be able to use the anticipated income to initially buy the home with a VA loan.