How To Buy Multi-Family in Denver-Metro Without a Down Payment
I can't keep quiet on this strategy any longer. After all, "A journey of a thousand miles begins with a single step".
There is currently an incredible opportunity to purchase a multi-family home in the Denver-Metro area using down payment assistance. In fact, if you structure the deal right, it is possible to purchase a multi-family home (2-4 units) with ZERO cash to close. You also don't need to be a first-time home buyer or a VA eligible veteran to do this.
If you're looking for the ultimate house-hack strategy, continue reading.
As most readers may already know, FHA financing allows for a very low down payment at 3.5% of the purchase price. Well, what if you could get the entire 3.5% down payment and your closing costs covered by down payment assistance?
Currently, the metroDPA loan program is offering a forgivable down payment assistance loan with FHA financing. The down payment assistance loan is up to 6% of the first loan amount for borrowers with a 660+ FICO score, and up to 3.5% for 640-659 FICO score borrowers.
The metroDPA down payment assistance loan is forgivable over a 3 year period as long as the home is a primary residence for 3 years. In fact, the down payment assistance loan forgives at 1/36th of the original down payment assistance loan amount, which means 1/3rd of the down the payment assistance loan would be completely forgiven after the first year, 2/3rd's forgiven after the 2nd year, and completely forgiven at the end of the 3rd year. The down payment assistance loan is called a silent 2nd, meaning there is no monthly payment due on the down payment assistance loan, and the down payment assistance loan also does not accrue interest.
Let's go through some math to help illustrate the power of this loan program.
At the time of this writing, the FHA county loan limit for a fourplex (4 unit home) is $1,079,250. This means that the purchase price of the home could be as high as $1,118,393 with a 3.5% down payment. For our scenario, we'll assume a purchase price of $1,000,000 for nice round numbers.
- Est. Purchase Price = $1,000,000
- Down Payment = $35,000 (3.5% of the purchase price)
- Base Loan Amount = $965,000
- FHA Upfront Mortgage Insurance Premium (aka UFMIP) = $16,887 (1.750% of the base loan amount)
- Total Loan Amount = $981,887 (Base Loan Amount + UFMIP)
- 6% metroDPA Down Payment Assistance Loan = $58,913
In the quick numbers above, you'll notice that your actual down payment requirement is $35,000, but the metroDPA loan is $58,913. Since the metroDPA can be applied towards your down payment requirement, this means that your entire down payment of $35,000 would be covered by the metroDPA down payment assistance loan, and in-fact, you would actually have $23,913 leftover to help cover your closing costs.
Now, any lender that originates a metroDPA loan is going to charge a 1% origination fee, plus another 1.5% in closing costs (+/-). This means the remaining 2.5% leftover from the metroDPA down payment assistance loan covers your entire closing cost structure, making your initial out of pocket expense, zero. Boom!
Only qualify for the 3.5% down payment assistance loan, talk to your agent about negotiating seller concessions into your deal to help you cover closing costs. FHA financing allows for up to 6% of the purchase price in seller concessions which can be applied towards your closing costs, but not your down payment.
What About the Monthly Payment?
At the time of this writing, the metroDPA interest rate for the 6% down payment assistance loan with FHA financing is 5.500% on a 30 year fixed. Yes, I know that may seem high, but if you consider your initial acquisition cost of purchasing a Million dollar multi-family home for basically zero cash out of pocket, the rate doesn't matter. Also, nothing says you have to keep this interest rate for a full 30 years. Once the down payment assistance loan is forgiven after 3 years (36 months), you could look at a refinance to possibly get better loan terms.
Using the numbers from the scenario above, with a first loan amount of $981,887 at 5.500% (6.633% APR) over 30 years, your loan payment (Principal + Interest) would be $5,575.05. Full PITI+MI payment broken down below:
- Principal + Interest = $5,575.05/mo
- Est. Taxes = $500/mo
- Est. Insurance = $375/mo
- Mortgage Insurance = $679.36
- Total Payment (PITI+MI) = $7,129.41
Ouch! I know that's a high payment. If you fell out of your seat just now, remember, we're house hackers. Since we'll be occupying one unit, we'll have 3 units that we can rent out to help cover the mortgage expense. Let's assume that each unit can be rented for $2,400/mo in gross rent. This means that the units would be generating $7,200/mo in gross cash-flow to help cover your entire mortgage payment! Not accounting for any repair items, expenses, or vacancy, you would actually be cash-flow positive on a one million dollar home that you spent ZERO to acquire!
Now, let's assume that you pull out 25% from your gross rent of $7,200/mo to account for repairs, vacancy, Capital Expenditures, and Management Fees. $7,200 x 25% = $1,800/mo. This means you would have a net of $5,400/mo to cover your mortgage payment after repairs, CapEx, Management, and Vacancy. $7,129.41/mo minus $5,400/mo = $1,729.41 would be your actual net cost to live in the home.
In fact, this is how mortgage lenders would calculate your qualifying income on the loan application as well. Mortgage lenders would be able to give you qualifying income of 75% of the gross rent to help you qualify for the mortgage. This means that even if your income was $70,000/year from your job, your qualifying income on the loan application would be a total of $134,800/year ($5,400/mo net rent x 12 = $64,800 + $70,000). The qualifying rent income would be determined by the appraiser after you're under contract, and the lender would give you credit for 75% of the gross rent listed on the appraisal.
Under metroDPA, your total debt-to-income ratio would be capped at 45% of your qualifying income. In the event your debt-to-income ratio exceeds 45%, metroDPA allows for non-occupant co-signers. This means you could get a co-signer to help you qualify for this loan. To my knowledge, metroDPA is the only down payment assistance program in Colorado that accepts non-occupant co-signers.
Now, metroDPA does have an income limit of $139,200/year. Only qualifying income from the occupant borrower counts towards this income limit. This means that if you had a co-signer on your loan and the co-signer was making $500,000/year, you would still be eligible for the metroDPA loan program.
metroDPA is not currently available in all areas of Colorado. For a list of participating cities and counties, visit https://www.ehousingplus.com/available-programs/colorado/metrodpa/ and review the "Eligible Areas" section.
If you made it this far, congratulations! You are now way ahead of most of the house hacking competition out there. Thank you for reading. Now go forth, and acquire real estate.
Comments (4)
Hi @Chris Lopez - Great questions! Thank you for reading through the article and for asking. See my responses below in bold italics:
1) "Reservation to Loan Purchase: 60 days" - Does this mean it has be a 60 day close? That's tough / about damn impossible on a multi in Denver! - No. In fact, I just closed one of these today in about 25 days. The 60 day reservation period means the interest rate lock is valid for 60 days once locked/reserved.
2) A fourplex that rents at $2,400/mo for each unit ($2,400 * 4 * 12) = 115,200 gross rents * 75% = $86,400 NOI / $1,000,000 purchase price = 8.64% cap rate. Those don't exist in Denver! I know you were using simple math for example purchases, but using a realistic 5.5 to 6.0 cap rate still work with this loan in regards to DTI and underwriting. - I suppose the monthly rent would depend on the property, and rent demand. Also, the assumptions I was making above assume that the primary borrower would occupy one of the 4 units as a primary residence in order to qualify, since metroDPA is only available for primary residences and not investment properties. A primary residence means that the borrower has the intent to occupy the home within 60 days of closing, and for at least 12 consecutive months past the date of occupancy barring any unforeseen issues & circumstances. Therefore, $2,400/mo x 3 rented units = $7,200/mo gross rent x 75% = $5,400/mo NOI or $64,800/year NOI. Of course, every deal is a little bit different, and the rent would need to be analyzed accordingly for each property. I'd assume that a $1,000,00 quad would demand higher rent, but maybe not? If the quad was $750,000 and the rent was $1,300/3 rented units, this would be $3,900/mo gross rent or $$2,925/mo NOI. The est. PITIMI on a $750,000 4-plex would be $5,409.72 under this program. Every deal is different, and every borrower's qualifying financial position is different.
I ask this because I'm familiar with the Home Possible program from Freddie. Like it looks great but doesn't really work in Denver income restrictions and purchase prices. - HomePossible was & still is an awesome program. The major difference that makes HomePossible less of a viable solution, is the qualifying income restriction being reduced to 80% of the area median income limit depending on the location of the subject property. I agree that it is much more difficult to qualify for multi-family under HomePossible with the new income restrictions. metroDPA and HomePossible are different loan programs and carry different income restrictions.
3) Can you confirm that it works for fourplexes? I found an article on Arvada's website that states: "What sorts of homes or properties can I purchase?
Single-family, detached house
Condominium or townhome
Duplex
You must occupy the home as your primary residence. We do not have a limit on the property price beyond what your lender believes you can qualify for. Note: This program does not include refinancing of properties you already own - Yes. metroDPA definitely works one one to four unit residences, as long as the home is considered a primary residence (e.g. occupy within 60 days of closing and for at least 12 months past the date of occupancy), and the financing type is FHA (multi-family not allowed with conventional financing). The specific guidance for this is on page 11 (Property Requirements) of the administrator's guide which can be found at https://www.ehousingplus.com/wp-content/uploads/metroDPA-Guide-07-23-19.pdf
Seth Wilcock, over 5 years ago
Hey @Seth Wilcock Thanks for posting this. I've never heard of this program and started reading up on the website. A few questions:
1) "Reservation to Loan Purchase: 60 days" - Does this mean it has be a 60 day close? That's tough / about damn impossible on a multi in Denver!
2) A fourplex that rents at $2,400/mo for each unit ($2,400 * 4 * 12) = 115,200 gross rents * 75% = $86,400 NOI / $1,000,000 purchase price = 8.64% cap rate. Those don't exist in Denver! I know you were using simple math for example purchases, but using a realistic 5.5 to 6.0 cap rate still work with this loan in regards to DTI and underwriting.
I ask this because I'm familiar with the Home Possible program from Freddie. Like it looks great but doesn't really work in Denver income restrictions and purchase prices.
3) Can you confirm that it works for fourplexes? I found an article on Avada's website that states: "What sorts of homes or properties can I purchase?
Single-family, detached house
Condominium or townhome
Duplex
You must occupy the home as your primary residence. We do not have a limit on the property price beyond what your lender believes you can qualify for. Note: This program does not include refinancing of properties you already own"
Thank you!
Chris Lopez, over 5 years ago
Hey @Seth Wilcock Thanks for posting this. I've never heard of this program and started reading up on the website. A few questions:
1) "Reservation to Loan Purchase: 60 days" - Does this mean it has be a 60 day close? That's tough / about damn impossible on a multi in Denver!
2) A fourplex that rents at $2,400/mo for each unit ($2,400 * 4 * 12) = 115,200 gross rents * 75% = $86,400 NOI / $1,000,000 purchase price = 8.64% cap rate. Those don't exist in Denver! I know you were using simple math for example purchases, but using a realistic 5.5 to 6.0 cap rate still work with this loan in regards to DTI and underwriting.
I ask this because I'm familiar with the Home Possible program from Freddie. Like it looks great but doesn't really work in Denver income restrictions and purchase prices.
3) Can you confirm that it works for fourplexes? I found an article on Avada's website that states: "What sorts of homes or properties can I purchase?
Single-family, detached house
Condominium or townhome
Duplex
You must occupy the home as your primary residence. We do not have a limit on the property price beyond what your lender believes you can qualify for. Note: This program does not include refinancing of properties you already own"
Thank you!
Chris Lopez, over 5 years ago
Hi @Chris Lopez - Great questions! Thank you for reading through the article and for asking. See my responses below in bold italics:
1) "Reservation to Loan Purchase: 60 days" - Does this mean it has be a 60 day close? That's tough / about damn impossible on a multi in Denver! - No. In fact, I just closed one of these today in about 25 days. The 60 day reservation period means the interest rate lock is valid for 60 days once locked/reserved.
2) A fourplex that rents at $2,400/mo for each unit ($2,400 * 4 * 12) = 115,200 gross rents * 75% = $86,400 NOI / $1,000,000 purchase price = 8.64% cap rate. Those don't exist in Denver! I know you were using simple math for example purchases, but using a realistic 5.5 to 6.0 cap rate still work with this loan in regards to DTI and underwriting. - I suppose the monthly rent would depend on the property, and rent demand. Also, the assumptions I was making above assume that the primary borrower would occupy one of the 4 units as a primary residence in order to qualify, since metroDPA is only available for primary residences and not investment properties. A primary residence means that the borrower has the intent to occupy the home within 60 days of closing, and for at least 12 consecutive months past the date of occupancy barring any unforeseen issues & circumstances. Therefore, $2,400/mo x 3 rented units = $7,200/mo gross rent x 75% = $5,400/mo NOI or $64,800/year NOI. Of course, every deal is a little bit different, and the rent would need to be analyzed accordingly for each property. I'd assume that a $1,000,00 quad would demand higher rent, but maybe not? If the quad was $750,000 and the rent was $1,300/3 rented units, this would be $3,900/mo gross rent or $$2,925/mo NOI. The est. PITIMI on a $750,000 4-plex would be $5,409.72 under this program. Every deal is different, and every borrower's qualifying financial position is different.
I ask this because I'm familiar with the Home Possible program from Freddie. Like it looks great but doesn't really work in Denver income restrictions and purchase prices. - HomePossible was & still is an awesome program. The major difference that makes HomePossible less of a viable solution, is the qualifying income restriction being reduced to 80% of the area median income limit depending on the location of the subject property. I agree that it is much more difficult to qualify for multi-family under HomePossible with the new income restrictions. metroDPA and HomePossible are different loan programs and carry different income restrictions.
3) Can you confirm that it works for fourplexes? I found an article on Arvada's website that states: "What sorts of homes or properties can I purchase?
Single-family, detached house
Condominium or townhome
Duplex
You must occupy the home as your primary residence. We do not have a limit on the property price beyond what your lender believes you can qualify for. Note: This program does not include refinancing of properties you already own - Yes. metroDPA definitely works one one to four unit residences, as long as the home is considered a primary residence (e.g. occupy within 60 days of closing and for at least 12 months past the date of occupancy), and the financing type is FHA (multi-family not allowed with conventional financing). The specific guidance for this is on page 11 (Property Requirements) of the administrator's guide which can be found at https://www.ehousingplus.com/wp-content/uploads/metroDPA-Guide-07-23-19.pdf
Seth Wilcock, over 5 years ago