Change a 5-Unit to 4-Unit for FHA (owner-occupied) Approval?

Question

Greetings All ~ Thank you in advance for any support with this.

I've been looking for a 3-4 unit multi-family to purchase with an FHA loan (or FHA203 if needed).  While searching, I found a 5-unit property that is of interest.  I know the types of FHA loans I plan to use are limited to 4-units max.  At this particular property I would live in a 1-bdrm unit on the third (top) floor.

***There's a small unit with a separate entrance on the first floor (rear).  To qualify this property for FHA lending with 4-units max, can I simply use this unit as my personal, at-home office - even if it is not attached to the unit in which I will live?

Does anyone have any ideas/experience with getting this to qualify for the FHA financing?  I would actually like/want office space, but I may convert it back to a unit later, even if years later.

I'm in Philadelphia, PA.  I've heard of people turning one unit into storage too.  I'm open to ideas, I just want to be confident it will work before moving forward with the process.

Thanks again for any help.

Greg H. · Answer

Take out the kitchen and you are in business.  Easy enough to reinstall at some point if you wish to do so

Wayne Brooks · Answer

@John Winters @Steven Goldman A 221d4 is primarily for the Construction of large multi units.
If the property Is 5 units….then it is 5 units. You can’t change this simply by saying “I’ll use it for storage”, you’d have to demo/alter the unit to change it….prior to getting loan approval.

Will Patterson · Answer

Hi there. Any updates on this project because I am curious how the lender felt about this and was it worth it in the long haul.

John Winters · Answer

@Eric Greenberg Hey Eric, thanks for jumping in too!  I see you're in Philly as well.  Nice.  That's a good point.  It has the sprinkler system required (I believe) for 4-units+, but I don't recall there being a zoning variance specifying 5-units.  I'm going to check on that...thanks!

John Winters · Answer

Thank you everyone for sharing!  I greatly appreciate your feedback and the information.

@Steven Goldman Steven, it's good to meet you here online.  I see you are in PA too.  I am definitely starting to see the value of your point -- 'find the product to match the problem.'  I am beginning to see the depth of options - and parameters!

@Steven Goldman @Wayne Brooks I appreciate the insight about the 221d4.  I'm not there yet - constructing large multi-units is a goal, but for now, I have to humbly work up to it -- the 3.5% down (FHA) is working best for me at this point.  Thanks Wayne, for the straightforward clarity - '5 units is 5 units.'  I'd like to use the fifth as a personal office, even with the kitchen for ease, BUT I hear you - that's not going to work without alterations.

@Greg H. Thank you!  For this property, I believe this will be the path.  It's already priced a little on the high side ("upcoming neighborhood" price), and FHA 203k won't let me do the work of taking out the kitchen myself, so that's more money of course. I might be able to slide this in on a 203k and still have the numbers work - or maybe the current owner will agree to do it for a somewhat quicker close.

I'm guessing taking out the kitchen means removing appliances, faucet(s), and capping lines; cabinets can stay.  Then this space can be my personal office, and lenders will be satisfied.  If so, that's not too crazy.

Again, thank you everyone for sharing - this is much appreciated!

Eric Greenberg · Answer

I agree you could potentially take out the kitchen but they may still look at the zoning. Is there a variance specifying the property being a 5-unit?

Steven Goldman · Answer

I agree with every thing Wayne said.... My point was you need to find the product to match the problem. I know of multi family lenders that will do 5-8 units but you need at least 20 percent down. You should probably stay away from multi units if you do not have adequate cash reserves on hand or, available for contingencies. Good luck!

Steven Goldman · Answer

Good Morning:  As a mortgage broker the most important thing is to know your projects and your products and be able to match them effectively.  I believe the five unit is eligible for a HUD Multi Unit loan. Here is a description from their website:

MORTGAGE INSURANCE FOR RENTAL AND COOPERATIVE HOUSING: SECTION 221(D)(4)

Summary:Section 221(d)(4) insures mortgage loans to facilitate the new construction or substantial rehabilitation of multifamily rental or cooperative housing for moderate-income families, elderly, and the handicapped. Single Room Occupancy (SRO) projects may also be insured under this section.

Purpose:Section 221(d)(4) insures lenders against loss on mortgage defaults. Section 221(d)(4) assists private industry in the construction or rehabilitation of rental and cooperative housing for moderate-income and displaced families by making capital more readily available. The program allows for long-term mortgages (up to 40 years) that can be financed with Government National Mortgage Association (GNMA) Mortgage Backed Securities.

Type of Assistance:FHA mortgage insurance for HUD-approved lenders.

Eligible Activities:Insured mortgages may be used to finance the construction or rehabilitation of detached, semidetached, row, walkup, or elevator-type rental or cooperative housing containing 5 or more units. The program has statutory mortgage limits which vary according to the size of the unit, the type of structure, and the location of the project.

Eligible Borrowers:Eligible mortgagors include public, profit-motivated sponsors, limited distribution, nonprofit cooperatives, builder-seller, investor-sponsor, and general mortgagors.

Eligible Customers:All families are eligible to occupy dwellings in a structure whose mortgage is insured under this program, subject to normal tenant selection. There are no income limits. Projects may be designed specifically for the elderly or handicapped.

You should research a broker or lenders who can help you with this project. Over my years of experience I have learned that this is the best way to evaluate your financing options. Good luck. I love real estate!

Change a 5-Unit to 4-Unit for FHA (owner-occupied) Approval?

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