Down Payments for Duplexes, Triplexes, & Quads: What Do I Need?

Mortgage experts are predicting an increase in home prices toward the end of 2014. While the mortgage rate increase is still historically low, potential property investors should consider the steps they can take to prepare for a potential increase in these rates. Down payments are one way to mitigate the effects of an increase in mortgage rates. However, a new property investor may be unsure what percent they should put down for a down payment.

All Property Management did some research to help both our property managers and property investors better understand down payments for duplexes, triplexes, and quads.

Most people understand the basic minimum down payment requirements for single-family personal residences. Fannie Mae will buy mortgages from your lender with a down payment down to 5% (a gift down payment is now ok, thanks to a recent underwriting rule change from Fannie Mae and from Freddie Mac, under Freddie's HomePossible program). FHA programs down to 3.5%, and zero down for qualifying veterans under the VA Home Loan program.

Factors To Consider When Putting Payment Down on Duplexes, Triplexes, & Quads

Things get a bit more complicated for duplexes and quads, though, because even when the owner lives on site, these dwellings are almost by definition a combination of investment/rental property and personal residence.

The answer, as always, depends on a variety of factors, including the loan type, your credit score, and whether you plan on residing on the property.

Veteran Status

If you are a qualifying veteran with a certificate of eligibility for a VA loan, you can use those benefits to purchase property up to four units, nothing down, provided you plan to live on site. In addition, there's no private mortgage insurance due on VA loans, even on zero down loans, because the federal guarantee serves in its stead.

FHA Loans

FHA guidelines also allow you to buy 2-4 unit properties with down payments as low as 3.5%, provided you live on site. However, FHA just reduced the maximum loan amount they will underwrite for these types of properties as of January 1, 2014. Specifics depend on your metro area: FHA underwrites higher loan amounts in expensive markets like Honolulu and San Francisco, for example.

Note that you still have to meet requirements to get the 3.5% down payment. You must have a reasonable credit score and debt-to-income ratio, for example. However, you can use gifts from family members towards this down payment.

In theory, you can qualify for an FHA loan with a credit score of at least 580. In reality, though, individual lenders tend to have much stricter requirements. Generally, you'll want a FICO score of 640 or better to have access to a variety of lenders in the FHA space.

Be aware that the Federal Housing Administration recently increased PMI premiums, so it's not as attractive an option as it used to be, even with the lower down payment requirements compared to conventional loans.

Absentee Landlords

For absentee landlords, that is, owners who do not plan to live on the property, plan on a 25% down payment, regardless of the financing source. This is roughly in line with traditional mortgage guidelines for investment properties, in general.

That's not a terrible thing. If you have trouble coming up with 25% of the purchase price yourself, that's a pretty strong economic signal that you aren't in a position to maintain the property with your own resources, either. Between the inevitable vacancies, occasional bad tenants, vandals, and unexpected repairs and maintenance costs, you're going to need a source of liquidity sooner or later to maintain a rental property. You never want to be in a position of relying on 'luck,' because continued good luck is not security or risk management.

Owner/Occupants: First Homes

If you're an owner/occupant, you may qualify for a lower down payment, but not as low as you would qualify for if you were occupying a single-family home. The chief advantage to being an owner-occupant in a duplex, triplex, or quad unit is that you can still choose to use a VA or FHA loan, which gives you more down payment flexibility.

Conforming Mortgages: Fannie Mae will buy mortgages at 15% of LTV for a duplex, provided you otherwise qualify with debt-to-income guidelines and have a decent credit score (at least 620). You also need to use a fixed-rate mortgage. If you have an adjustable-rate mortgage, plan on coming up with an additional 10% down, for a minimum 25% down for a duplex. Note you'll have to pay PMI premiums until your loan to value gets over 20% anyway. So there may not be much advantage to putting down 15% instead of 25% if you wind up having to pay extra for the PMI that benefits your lender and not you.

However, for a three-or four-unit property financed with a fixed-rate mortgage, you can probably expect to be back in the neighborhood of a 25% down payment. That's with a pretty straight-ahead credit history and no weirdness about the home. If you use an adjustable-rate mortgage, plan on coming up with 35% down.

If the dwelling is an unusual property, such as a tiny house or home made from fully recycled materials, you may have to pay more. Lenders are hesitant to finance a property that they can't appraise because there aren't other properties that they can compare it to in order to assess the value. You may also have to pay more if you are self-employed or otherwise have a non-standard income source. One veteran underwriter says Fannie and Freddie will underwrite a loan up to a 45% debt-to-income ratio if they can run it through their standard desktop underwriting system. If it has to be manually underwritten, though, your top loan to value ratio is going to be limited by your debt-to-income ratio.

Investment Properties

Not planning on living on site? Pretty much everything you do beyond a single-family dwelling is going to require 25% down, if you go with a qualifying fixed-rate mortgage. That figure goes up to 35% down if you are using an adjustable-rate mortgage, according to Fannie's own eligibility matrix. Property investors should also consider hiring a property manager to help manage their new property.

Cash-Out Refinancing

Rules are a little tighter for any refinancing that involves taking cash out. Owner occupants will have to maintain at a loan-to-value ratio of at least 75% (with fixed-rate mortgages) or 65% with adjustable rate mortgages. That means if you have a property worth $100,000, all paid off (so it's all equity), the most you can borrow is $75,000 for a fixed-rate mortgage, or $65,000 for an adjustable rate mortgage.

Manual Underwriting Criteria

Fannie Mae has made its eligibility underwriting matrix available online, which provides some valuable insights. If your income source, funding source, or property doesn't qualify for the cookie-cutter programs they have mostly automated, things get a bit more involved.

Your debt-to-income is a key metric in this world. As we mentioned, you need to keep your DTI under 45% at most. But you can qualify for much better if you can keep your DTI under 36%, which renders you eligible for the best programs.

If your DTI is under 36%, you can finance a 2-4 unit investment property for 25% down on a fixed mortgage (35% for an ARM), provided your FICO score is 660 or better and you can show six months worth of reserves. As soon as your DTI goes over 36%, though, you'll need to show 12 months of reserves unless you can push your FICO score over 680. At that point you're back to only needing six months of reserves again.

FICO, requirements for manually-underwritten cash-out refinances are much more stringent, with a minimum 700 credit score and 12 months reserves on hand (six months if your FICO is greater than 720).

For purchases, the better your credit score, the more financing you can qualify for, in general. The lowest score they' re looking for is 640 if you can come up with at least 25% down (35% for ARMs).

The rules are complex, but if you can determine your credit score and get a solid handle on your DTI, and if you can determine whether your transaction is likely to fall under standard underwriting or whether it will have to be manually underwritten, you can get a good idea of what minimum down payment you can qualify for under Fannie Mae guidelines by using the matrix or stick with the low down payment FHA or no-down-payment Veterans Affairs loans if they make more sense to you.

Both seasoned and new property investors should know as much information as possible since mortgage rates expected to rise in 2014. All Property Management plans on keeping track of current trends and will continue to update both our property managers and property investors.