Lending options for 2-4 units - 2021

[Henry Lazerow]

Thought this might be helpful for first time buyers so have all the 2021 options in one place as well as the math for Self Sufficiency Test. Please note I am NOT a lender and just sharing this info as a resource. Feel free to add any options.

Closing Credits

I always put a 2-3% closing cost credit for my buyers. For non-owner occupant you can do 2% and for owner occupant can do 3%. What this does is adds close costs into mortgage amount so you need to bring less money to close. Less money down gives you a higher Cash on Cash return for the investment!

Conventional

Typically with conventional financing (Fannie Mae/Freddie Mac) the down payment requirements are 15% with a 2-unit and 20% with a 3 and 4-unit property. This is owner occupant. Non owner occupant will be 25%. 

FHA

For an FHA loan you are able to go as low as 3.5% down on 2-4 unit properties. For 3 and 4 unit properties, FHA has a self-sufficiency rule that the property must pass in order to obtain financing. The rule is: The market rents for all of the units x 75% has to be greater than your all-in monthly mortgage payment. For example, if you have a 4-unit property that each unit has a market rent of $1,000 or $4,000 total. The $4,000 x 75% = $3,000 has to be greater than your total monthly mortgage payment (principal and interest, taxes, home insurance, and mortgage insurance). It can be hard to find a property that will pass this test with a lower down payment. Some neighborhoods it's easier to pass are Brighton Park, Bronzeville, etc. the higher cashflow ratio area 4 units Mckinley/Bridgeport.

FHA 203K
Not my favorite as the cost of the rehab can get crazy with all the additional fha requirements. The truth is majority of light rehabs in Chicago are done without permits so you will be bidding against people on the property who aren't pulling permits and have a very different total rehab cost. FHA often makes you do things like a new water main on 3/4 units when adding too many new outlets which can be 20k+ alone or extensive waterproofing work in basements $10k+. If doing a larger rehab though where would pull permits anyways then FHA 203K can be a cool option. Similar rules to above 3.5%+ down and the self sufficiency test applies. I have not had issue with self sufficiency though as can use high projected rents that newly rehabbed units are going for.

NOTE: Experienced realtors who have other options for buyers will advise their client NOT to accept your offer when FHA 203K vs a similar priced Conventional offer as the 203K has a significantly higher chance of not closing due to budget too high, etc. so you may have to offer stronger then normal to get these 203K offers accepted, especially in this market.

Portfolio: 

Down payments as low as 10% on 2-4 units all throughout Chicago. No PMI. Typically $600,000 loan limit but can go higher on a case by case basis. This is typically a 5 year arm and there is an origination fee of 1% point associated with this program. Credit has to be solid.

There are other "portfolio" programs out there also such as SoFi which is 10% down but only on 2 units and at amazing rates. I haven't closed one personally with SoFi but from conversations it sounds solid and well reviewed. 

VA:

This a loan for veterans, active duty military, and so on. This type of loan often has many benefits over the other loan types as long as you qualify (no mortgage insurance, typically lower interest rates, and are able to put $0 down in certain scenarios).

Doctor Loan:

This is for 1-2 unit properties. No PMI and 0% down. I used to have an option for 3/4 units but currently they aren't doing it, this may change in the future.

Loan limits: Note: These are loan amount not purchase price. To stay within limits can always put more down, etc. 

• Conventional:
  • 2-unit: $702,000
  • 3-unit: $848,500
  • 4-unit: $1,054,500
• FHA:
  • 2-unit: $485,800
  • 3-unit: $587,250
  • 4-unit: $729,800
• Portfolio:
  • 1-4 units: $600,000 or case by case higher. 2 units SoFi no limits. 
• VA:
  • 1-4: $548,250
• Doctor Loan:
  • 1-2-unit: $750,000 with 0% down
  • 1-2 unit: $1,250,000 with 5% down

[Zack Karp]

@Henry Lazerow great write up.  The only thing you should amend is with the closing cost credits. It does not add closing costs into the mortgage amount. The seller credit reduces the out of pocket amount by paying the closing costs.

Conventional - investment property = 2% max

Conventional - primary residence - over 90% LTV = 3% max

Conventional - primary residence - 75.01% - 90% LTV = 6% max

Conventional - primary residence - 75% LTV or less = 9% max

FHA = 6% max

These credits are also capped at the actual amount of closing costs and prepaids. So for FHA, if the purchase price is $400K, you cannot get a $24K seller credit unless the closing costs and prepaids equal $24K. Which is very unlikely unless adding points to buy down an interest rate.

Hope that helps!