What Mortgage Lenders Look for When You Buy a 2-4 Family Home

September 18, 2017

There’s a wealth of information available about mortgages to purchase single-family, owner-occupied homes. But much harder to come by is what mortgage lenders look for when you buy a 2-4 family home. Let’s take a look at those regulations regarding each category of the home buying process.

Maximum Mortgage Loan Limits

Fortunately, you can get larger loans on multi-family homes than you can for a single family home. For 2017, the maximum mortgage loan limits for most of the country look like this:

  • Single family home, $424,100
  • Two-family home, $543,000
  • Three-family home, $656,350
  • Four-family home, $815,650

There are higher loan limits for regions of the country designated as “high-cost areas” (determined by average house prices on a county-by-county basis). For 2017, those loan amounts are as follows:

  • Single family home, $636,150
  • Two-family home, $814,500
  • Three-family home, $984,525
  • Four-family home, $1,223,475

Source: Fannie Mae Loan Limits for Conventional Mortgages

Down Payment Requirements

Down payment requirements are higher for multi-family homes than for single-family homes, where down payment requirements can be as low as 3%. Down payments for the purchase of owner-occupied multi-family properties are:

  • 2 units, maximum loan-to-value (LTV) 85% – down payment 15%
  • 3-4 units, maximum LTV 75% – down payment 25%

Down payment requirements for the purchase of investment properties:

  • 2-4 units, maximum LTV 75% – down payment required 25%

Source: Fannie Mae Eligibility Matrix

Cash Reserve Requirements

Cash reserves are defined by mortgage lenders as an amount of liquid cash sufficient to cover your monthly house payment for one month. Your monthly house payment is defined as the principal and interest on your actual mortgage payment, plus a monthly allocation for real estate taxes, homeowners insurance, flood or earthquake insurance (if required) or private mortgage insurance.

Lenders typically require that you have anywhere from two months to as many as 12 months in cash reserves. These are intended to act as a financial cushion during the critical early months of homeownership.

For example, let’s say that your basic monthly mortgage payment is $1,200. Your monthly real estate tax allocation is $300, while you are paying $100 per month toward homeowner’s insurance and another $100 toward private mortgage insurance.

Your total monthly house payment is $1,700. If the lender requires that you have six months of cash reserves, then you will need to have $10,200 in liquid assets.

For cash reserve purposes, liquid assets can include balances in your checking or savings accounts, certificates of deposit, investment brokerage accounts, and the vested balance in any retirement account.

Cash reserves are not always required for single-family owner-occupied properties, but they will be required in the case of 2-4 family properties, whether they are owner-occupied or investment properties.

If you are purchasing a 2-4 family house, you will generally be required to have cash reserves sufficient to cover at least six months. That applies whether the property will be owner-occupied or a non-owner-occupied investment property.

Source: Fannie Mae Eligibility Matrix

Debt-to-Income (DTI) Requirements

DTI is your combined fixed monthly expenses, divided by your stable monthly income. For example, if you’re fixed monthly expenses come to $2,000, and your stable monthly income is $5,000, then your DTI is 40% ($2,000 divided by $5,000).

Fixed monthly expenses are the total of your new monthly house payment, plus any other fixed recurring payments. Those can include monthly payments on student loans, auto loans, credit cards, or child support or alimony payments. They do not include monthly expenses, such as utilities, life and health insurance payments, child care, or grocery bills.

When you purchase a 2 to 4 family property, your DTI is generally limited to 36%. However, lenders can go as high as 45% under certain circumstances.

For example, on an owner-occupied two-family home, lenders can go as high as 45% under the following circumstances:

  • If you are making a down payment of 25% or more, cash reserves equal to six months, and your credit score is at least 660.
  • If you are making a down payment of less than 25%, cash reserves equal to six months, and your credit score is at least 700.
  • If you are making a down payment of 25% or more, cash reserves equal to 12 months, and your credit score is at least 640.
  • If you are making a down payment of less than 25%, cash reserves equal to 12 months, and your credit score is at least 680.If you are purchasing an owner-occupied 3 to 4 family home, lenders can go as high as 45% with a credit score of at least 680 and six months cash reserves, or a credit score of at least 660 and 12 months cash reserves.Source: Fannie Mae Eligibility Matrix

    Credit Score Requirements

    Credit score requirements for a 2-4 family house depends in large part on your DTI. If your DTI is no higher than 36%, then the following credit score requirements apply:

        • If you are putting down less than 25% on an owner-occupied two-unit property, then you must have a minimum credit score of 680. If you put down 25% or more, your credit score can be as low as 640.
        • On 3-4 unit owner-occupied homes, you must have a minimum credit score of 660.
        • On a non-owner-occupied 2-4 family investment property, you must have a minimum credit score of 660.

    If your DTI is higher than 36%, but not more than 45%, then the following credit score requirements apply:

        • If you are putting down less than 25% on an owner-occupied two-unit property, then you must have a minimum credit score of 700. If you put down 25% or more, your credit score can be as low as 660.
        • On 3-4 unit owner-occupied homes, you must have a minimum credit score of 680.
        • On a non-owner-occupied 2-4 family investment property, you must have a minimum credit score of 680.

    Source: Fannie Mae Eligibility Matrix

    How Mortgage Lenders Calculate Rental Income

    How mortgage lenders calculate rental income received on a property being purchased depends upon whether or not the borrower will occupy the home.

    If the borrower is purchasing a 2-4 family property and intends to live in one of the units, then the lender will add the rental income from the remaining unit(s) to the borrower’s income. However, they will first deduct 25% of the rental income as an estimate to cover vacancy and ongoing maintenance costs.

    For example, if a borrower is purchasing a four-family property, and will be receiving $3,000 per month in rent from the remaining three units, the lender will add $2,250 ($3,000 X 75%) to the borrower’s income. The lender will then calculate the DTI based on the revised income.

    The calculation is different if the borrower will not be occupying the property. For example, let’s say that you are purchasing a four-family property, that is expected to produce $4,000 per month in rental income. The lender will recognize $3,000 in monthly rent income ($4,000 X 75%).

    They will then apply that income against the monthly payment on the house (principal, interest, taxes, and insurance, or PITI). If the monthly PITI payment is $2,500, the property will show a net profit of $500. That profit will be added to the borrower’s income to calculate the DTI ratio.

    If the monthly PITI payment is $3,500, the property will show a net loss of $500. That loss will be added to the borrower’s long-term debt payments, including the payment on the borrower’s primary residence, as well as other non-housing debts.

    The calculation of the rental income (or loss) will be included in the DTI ratio, which must fit within the parameters described above (36% or 45%).

    Source: Fannie Mae Selling Guide Rental Income

    As you can see, purchasing a 2-4 family home is a bit more complicated than a single family home. But with a little bit of knowledge – and the right mortgage lender – you’ll get the loan that you need for the property that you want to buy.

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