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How to buy a mixed-use property with an FHA loan

Jim Quist Jan 29, 2024 5:00:00 PM
Mixed-use 2-to-4 units FHA loan Jim Quist NewCastle Home Loans

Home buyers can use an FHA loan to buy a mixed-use, multi-unit property with a down payment of only 3.5% of the property's purchase price.

FHA's low down payment option and flexible program guidelines make it easy for homebuyers, even first-timers. You can own the building where you live and work or generate income from residential and commercial tenants.

In this article, I'll explain the program requirements and how you can take advantage of this unique investment opportunity.

What is a mixed-use property?

A typical mixed-use property in Chicago is a multi-story building in a densely populated neighborhood. Generally, the commercial space is a ground-floor retail store, office, or restaurant. At the same time, the residential units are apartments on the upper floors.

mixed use property chicago


What are FHA's requirements for a mixed-use property?

FHA has specific requirements for a mixed-use, 2-to-4-unit property. These requirements include:

  • Property type: FHA allows for 2-to-4-unit properties with commercial space, provided a minimum of 51% of the entire building square footage is for residential use. Also, the property must comply with all applicable zoning ordinances. 
  • Occupancy: You must occupy at least one of the units as your primary residence within 60 days of closing and live there for at least one year. 
  • Self-sufficient: For properties with 3 and 4 units, the property must meet FHA's self-sufficiency test. Seventy five percent of the rental income from all the units, including the one you'll occupy, must cover the housing payment. The housing payment includes the principal and interest, property taxes, and insurance (PITI).
  • Reserves: You may need a certain amount of savings to cover future mortgage payments, taxes, and insurance. Three-and-four-unit properties require three months of PITI in reserves after closing. 

To qualify for an FHA loan, you need a credit score of at least 580, a 3.5% down payment, a steady employment history, and proof that you earn enough income to make the mortgage payments.

Also, FHA has loan limits, so your loan amount cannot exceed FHA's County limit. 

It's important to note that most lenders don't offer FHA loans for mixed-use properties. Therefore, working with a lender like NewCastle Home Loans would be best because we understand the loan program requirements. We help you plan accordingly to ensure you meet all the criteria to qualify for the loan.

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How do I prepare to buy a 2-to-4-unit mixed-use property?

Suppose you're considering buying a 2-to-4-unit mixed-use property. In that case, there are several steps you can take to prepare for the process. Here are some key things to consider:

Get pre-approved for the mortgage: Getting pre-approved can help you determine how much you can borrow and give you a better idea of what properties you can afford. It also shows sellers that you're a serious buyer and can help you stand out in a competitive market.

Rely on NewCastle's staff of certified mortgage underwriters to pre-approve your mortgage and guide you to homeownership, ensuring everything goes smoothly.

Work with a real estate agent. Real estate agents access a broader range of listings, including off-market properties unavailable to the general public. Good agents increase your chances of finding a suitable property that meets your needs and budget. The best agents negotiate on your behalf with the seller or their agent to get the best possible deal.

All things considered, buying a 2-to-4-unit mixed-use property can be complex, so working with professionals who guide you through the process is essential. An experienced lender, agent, and attorney can save you time and money.

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Multi-Use FHA Loan 2


Example: How to buy a mixed-use property with an FHA loan  

First, let's say you buy a 3-unit mixed-use property for $750,000, make a down payment of 3.5%, and use an FHA loan to finance 96.5% of the purchase price. 

  • $750,000 Purchase Price
  • $723,750 Base Loan Amount of 96.5% of the purchase price
  • $736,415 Total Loan Amount after adding FHA UFMIP
  • $26,250 Down Payment of 3.5% of the purchase price

Next, assuming a 30-year fixed-rate FHA loan with an interest rate of 4.625%:

Total Monthly Payment: $5,615.72

Then, for mixed-use properties, at least 51% of the property's square footage must be residential. In addition, because the property is a 3-unit, it must be self-sufficient. To meet the self-sufficiency requirement, 75% of the rental income from the property must be at least $5,615.72 per month.

Suppose the gross rent, including your unit, is $7,500; after subtracting 25%, the net rent is $5,625. In this case, the property is self-sufficient.

A significant benefit of FHA is that it allows you to use a portion of the rental income to qualify for the loan. That is, you can add 75% of the rent you get from your tenants to your income. 


What if you plan to live in one unit and rent out the residential unit for $2,100 and the commercial space for $3,300? In this case, you'll collect $5,400 per month.

Next, subtract 25% for maintenance and vacancies to get $4,050. Then, add the $4,050 to your monthly income when qualifying for the FHA mortgage.


Can I rehab a building having both residential and commercial space with an FHA 203k loan?

If you qualify, you can use an FHA 203k loan to buy and renovate a mixed-use property. However, you can't use the 203k proceeds to finance costs associated with additions or alterations to the commercial space.

FHA 203k is a type of mortgage that allows homebuyers to purchase a one-to-four-unit property and finance the cost of repairs or renovations into the loan amount. 

To learn more about the FHA 203k loans, please click the button below and schedule a time on our calendar to talk with a renovation loan expert. 

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Jim Quist NewCastle Home Loans
President and Founder of NewCastle Home Loans. Jim has been in the mortgage business for 20+ years.

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