I Qualify for $700k SFH 5% down, but need 15% for $700 Duplex?

Question

My bank, Schools First FCU says I can do 3% down on a $650k SFH or 5% on a $750k SFH, but if they see that the home is actually a Duplex then they force the Down Payment to be 15% even if I can qualify for 3% Down with zero rental income! Seems like a broken system to me.

Are there banks that can give me a 3-5% conventional loan on a Duplex if they're the same price as a SFH? That seems crazy that I can put less money down on a property that will net me less money than one that could make my income higher or worst case scenario, just stay the same. I just don't see why they have to change the underwriting when I proved I can handle a $700k property without any additional income.

Am I misunderstanding anything? Are there banks that can qualify me for a property at a flat rate and down payment regardless of whether it's 1-4 units, as long as it's residential?

Jay Hurst · Answer

@Zach Stiegler   When lenders say a "conventional loan" they mean a loan the can be sold to Fannie Mae or Freddie mac.  These two agencies set the loan to value maxes for their loans.  Fannie and Freddie both require 15% down for an owner occupied 2 unit, and 25% down for an owner occupied 3 or 4 unit. So, that is the same no matter who the lender is. So, they are not changing the underwriting but rather doing what they are required.  Now, if you told them you planned on buying a duplex they should have told you this upfront.

FHA has a different set of rules then conventional. You can put down 3.5% for a 1-4 units as an owner occupier.

Here is the matrix and link directly to the source, Fannie Mae:

Fannie Mae loan to value matrix

Eric Veronica · Answer

Fannie/Freddie conventional guidelines require a larger down payment for 2-4 unit properties.  15% down for a duplex is the norm.  You may be able to find portfolio options with lower down payment requirements.   There is a conventional program called "Homepossible" which can be approved with as little as 5% down on a duplex.  The big catch with this program is that is requires your qualifying income to be below 80% of the area median income limit.  Since you are looking at 650k purchase price it is unlikely that your income will be low enough to be under the limit and still qualify for the loan from a debt to income ratio standpoint. In some parts of the country this is a valuable program but not in high priced coastal markets.

Chris Mason · Answer

In California, I don't think I've had a single person in that income "goldilocks zone" (high enough to justify a mortgage in the amount desired on a 2-4 unit, but not so high they're over the income limit -- not too cold, not too hot, juuuuust right) since they made that infamous change in July 2019.

It used to be my favorite loan program.

Duplex w/ FHA 3.5% down is a California relevant sweet spot.

3-4 unit generally do not pass self-sufficiency due to rent/price ratios that are driven by appreciation, so it's 20% down for that.

Robert Reynolds · Answer

You can do 3.5% FHA loan on a Duplex, not sure if your credit union offers that.

Miranda Holland · Answer

I'm pretty sure there is. The quickest way to find them might be to work with a licensed mortgage broker. They have a list of conventional lenders to match you with the right one

Dave Skow · Answer

@Zach Stiegler- thanks ...assuming you plan to lice in one side of the  duplex - you should  use a  FHA loan as  this allows  you to put  as  little as  3.5%  of the  purchase price ... has your lender / bank  offered  this as an option ?   FHA is  a  great option for multi fam  loans  with low down payments ...downside to  FHA loans  is that there is a  large  upfront mtg ins fee of 1.75%  charged  ( that can be   added to the new loan )  and  also that the monthly mortgage insurance  will be  permanent ( menaing you  have to  refinance the loan  if you want to have this large  fee  removed ) - good luck

Zach Stiegler · Answer

Thank you all for your posts!Sorry for the late response. Yes I had already looked at FHA loan for a quadplex and FHA has a minimum house distance if you already own / live in a property. I need to stay within the radius that FHA disqualifies us for in regards to existing home. Good news, I've spoken to make lenders (FCU's specifically) and actually found one that does "Essential Worker, Zero Down Payment" program that has reduced rates and no rules against already owning houses in the area. Just has a single unit max, live in the unit 1 year, and $750k loan with 0% down. But I'll be looking to buy more later and definitely keeping an eye out for pre built ADUs since my ADU that's being built now at my first home took 12 months to permit. Thanks everyone!

Louis Jeffries · Answer

@Zach Stiegler as @Jay Hurst posted the Fannie Mae down payment requirements they are progressively higher for a reason. Simply multiple units are a greater risk of default. As such if you are looking a 2-4 units for their income potential Consider FHA even at the slightly higher rate. This is a great way to start house hacking or even building a rental portfolio if that is your goal.

Zach Wain · Answer

@Zach Stiegler - correct! As other said, if you want a duplex go FHA.  FHA is amazing when comparing 2-4 unit primary homes vs conventional.  Yes, FHA has higher PMI (and up PMI), but conventional requires more downpayment and conventional rates are about 0.25% higher for multi unit homes.  FHA is the way to go for multifamily primary homes.

FHA (with some lenders) also allows 2-1 temporary buydowns which are a great tool to keep in mind during these higher interest rate environments...

I Qualify for $700k SFH 5% down, but need 15% for $700 Duplex?

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