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Multi-Unit Property Financing (2-4 Units)

Multi-unit property financing covers the mortgage rules, down payment requirements, rental income treatment, and appraisal considerations for properties with two to four residential units. These properties are eligible for residential loan programs (conventional, FHA, VA) with modified underwriting standards, and they serve as a common entry point for investors through owner-occupied house hacking strategies.

Key Takeaways

  • FHA allows as little as 3.5% down on 2-4 unit owner-occupied properties, making house hacking one of the most accessible paths into investment real estate.
  • Conventional investment property loans on 2-4 units typically require 25% down, compared to 5% or more for owner-occupied purchases .
  • Lenders apply a 25% vacancy factor to gross rental income when calculating the rental income available for qualification on conventional loans .
  • FHA requires three- and four-unit properties to pass a self-sufficiency test, meaning the property's rental income must cover the mortgage payment .
  • Appraisals for 2-4 unit properties use both the sales comparison approach and the income approach, and comparable sales may be limited in some markets.
  • Reserve requirements are higher for multi-unit properties and increase further for investment purchases and for borrowers with multiple financed properties.
  • Properties with five or more units are classified as commercial and are not eligible for residential mortgage programs.

How It Works

Qualifying with Rental Income from the Subject Property

The process of using rental income from a 2-4 unit property to qualify for a mortgage follows a specific sequence. First, the lender orders an appraisal that includes a rent schedule for all units. The appraiser determines the fair market rent for each unit based on comparable rental data in the area. If the property has existing tenants with leases, the lender uses the lesser of the lease rent or the appraised market rent for each unit. The rents from the units the borrower will not occupy are totaled to calculate gross rental income. The lender then applies a vacancy factor (typically 25% for conventional loans) to arrive at net rental income. This net rental income is compared to the monthly mortgage payment (PITIA). If net rental income exceeds the payment, the surplus is added to the borrower’s qualifying income. If net rental income is less than the payment, the shortfall is treated as additional monthly debt for DTI calculation purposes. This approach ensures the lender captures both the income benefit and the risk of vacancy when underwriting the loan.

FHA Self-Sufficiency Test for 3-4 Unit Properties

FHA imposes an additional requirement for three- and four-unit properties: the self-sufficiency test. This test requires that the property’s total rental income (from all units, including the unit the borrower will occupy, valued at market rent) be sufficient to cover the full mortgage payment after applying the vacancy factor. The purpose of the test is to ensure that the property can sustain itself financially even during periods when the owner might not be able to supplement the payment from personal income. If the property fails the self-sufficiency test, the FHA loan cannot be approved, regardless of the borrower’s personal income or assets. This test does not apply to two-unit FHA purchases . Borrowers considering a three- or four-unit FHA purchase should verify the property’s rental income against the projected mortgage payment before making an offer.

Down Payment Tiers by Occupancy and Program

The down payment structure for 2-4 unit properties varies by loan program and occupancy type. For owner-occupied primary residence purchases: FHA requires 3.5% down for all unit counts (2, 3, or 4 units); conventional guidelines require a minimum of 5% for two-unit properties and potentially 5-15% for three- and four-unit properties depending on automated underwriting findings ; VA requires no down payment for eligible veterans on 2-4 unit properties. For investment property purchases (non-owner-occupied): conventional loans typically require 25% down regardless of unit count; FHA and VA are not available. DSCR loans for 2-4 unit investment properties typically require 20-25% down, depending on the DSCR and the lender’s guidelines . Understanding these tiers is essential for investors calculating the capital required for each acquisition strategy.

Income Approach Appraisal Methodology

The income approach to appraising a 2-4 unit property involves estimating the property’s value based on the income it can generate. The appraiser determines the potential gross income (total rent from all units at market rates), subtracts a vacancy and collection loss allowance, subtracts estimated operating expenses (property taxes, insurance, maintenance, management), and arrives at net operating income (NOI). The NOI is then divided by a capitalization rate derived from comparable sales in the market to produce an indicated value. Alternatively, the appraiser may use a gross rent multiplier (GRM), which multiplies the gross monthly rent by a factor derived from comparable sales. The income approach provides a value indication that is reconciled with the sales comparison approach to arrive at the final appraised value. If the income approach suggests a significantly lower value than the sales comparison approach, it may indicate that the property is overpriced relative to its income potential, which is a warning sign for both the lender and the borrower.

House Hacking Cash Flow Analysis

Investors using the house hacking strategy should perform a detailed cash flow analysis before purchasing a 2-4 unit property. The analysis begins with the projected gross rental income from the non-owner-occupied units. From this, subtract the vacancy allowance (a conservative estimate is one month of vacancy per unit per year, or approximately 8%), estimated maintenance and repair costs (typically 5-10% of gross rent), property management fees if applicable, and any HOA dues. The net operating income from the rental units is then compared to the total mortgage payment (PITIA). If the net rental income exceeds the payment, the owner lives rent-free and generates positive cash flow. If the net rental income covers a portion of the payment, the owner’s effective housing cost is reduced to the remaining balance. The analysis should also account for capital expenditure reserves for major repairs (roof, HVAC, plumbing), which can be substantial on older multi-unit properties.

Related topics include investment property mortgage rules, dscr loans explained, rental property down payment requirements, and short-term rental (airbnb) income for mortgages.

Key Factors

Factors relevant to Multi-Unit Property Financing (2-4 Units)
Factor Description Typical Range
Occupancy Type Whether the borrower will occupy one unit as a primary residence or purchase the property as a non-owner-occupied investment Owner-occupied: 3.5% (FHA) to 5%+ (conventional) down; Investment: 25% down
Number of Units Properties with 3-4 units face additional requirements (FHA self-sufficiency test) compared to 2-unit properties 2 units have fewer restrictions; 3-4 units face self-sufficiency requirements under FHA
Vacancy Factor The percentage deducted from gross rental income to account for vacancy, turnover, and collection loss 25% for conventional loans; varies for FHA and DSCR lenders
Reserve Requirements Liquid assets the borrower must hold after closing, based on unit count, occupancy, and number of financed properties 2-6 months PITIA for subject property; additional reserves for other financed properties
Rental Income Documentation The source used to determine rental income: existing leases, appraiser market rent estimate, or both Lender uses the lesser of actual lease rent or appraised market rent

Examples

FHA House Hack on a Four-Unit Property

Scenario: A borrower purchases a four-unit property for $480,000 using an FHA loan with 3.5% down ($16,800). The borrower will occupy one unit. The appraiser estimates market rent at $1,100 per unit ($4,400 total for all four units). The total monthly mortgage payment (PITIA including FHA mortgage insurance) is $3,200. The FHA self-sufficiency test compares net rental income (after vacancy factor) to the mortgage payment. Using a 25% vacancy factor: $4,400 x 0.75 = $3,300 net rental income, which exceeds the $3,200 payment.
Outcome: The property passes the FHA self-sufficiency test because $3,300 in net rental income exceeds the $3,200 payment. The borrower qualifies for the loan. The three non-occupied units generate $3,300 per month in rents (before the vacancy deduction), substantially offsetting the mortgage. The borrower's effective housing cost is the mortgage payment minus the actual rent collected from three units, which could result in living nearly rent-free if occupancy remains high.

Conventional Investment Purchase of a Duplex

Scenario: An investor purchases a duplex for $350,000 as a non-owner-occupied investment property using a conventional loan with 25% down ($87,500). Each unit rents for $1,400 per month ($2,800 total). The monthly mortgage payment (PITIA) is $2,100. The lender applies a 25% vacancy factor to the gross rent: $2,800 x 0.75 = $2,100. The investor has six months of reserves ($12,600) for the subject property and two months of reserves on one other financed property.
Outcome: The net rental income of $2,100 exactly matches the mortgage payment, meaning the rental income fully offsets the housing expense for DTI purposes. The investor's DTI is calculated using only their other debts (the rental property adds $0 net). The six months of reserves on the subject property and two months on the other property meet the conventional reserve requirements. The loan is approved with the rental income fully supporting the payment.

Three-Unit Property Failing the FHA Self-Sufficiency Test

Scenario: A borrower applies for an FHA loan on a three-unit property priced at $520,000. The appraiser estimates market rent at $1,000 per unit ($3,000 total). The total monthly mortgage payment (PITIA plus FHA MIP) is $3,800. The self-sufficiency calculation: $3,000 x 0.75 = $2,250 net rental income, which is less than the $3,800 payment.
Outcome: The property fails the FHA self-sufficiency test because $2,250 in net rental income does not cover the $3,800 payment. The FHA loan cannot be approved for this property regardless of the borrower's income. The borrower's options include negotiating a lower purchase price (which would reduce the mortgage payment), choosing a different property with higher rents relative to the price, or switching to a conventional loan (which does not have a self-sufficiency test but requires a higher down payment and uses the rental income differently in DTI calculations).

Common Mistakes to Avoid

  • Assuming 100% of rental income can be used for qualification

    Lenders apply a vacancy factor (typically 25% for conventional loans) to gross rental income, meaning only 75% of the rent is counted for qualification. Borrowers who calculate their qualification based on full gross rental income will overestimate their borrowing capacity. The vacancy factor accounts for turnover, periods between tenants, and potential non-payment, and it cannot be overridden even if the property has historically maintained full occupancy.

  • Not verifying the FHA self-sufficiency test before making an offer on a 3-4 unit property

    The FHA self-sufficiency test can disqualify a property regardless of the borrower's income. If the property's rental income (after vacancy factor) does not cover the mortgage payment, the FHA loan cannot be approved. Borrowers should calculate the self-sufficiency ratio before making an offer and include appropriate contingencies in the purchase contract. Failing the test after entering into a contract wastes time and may result in forfeited earnest money.

  • Underestimating reserve requirements for multi-unit investment properties

    Reserve requirements for multi-unit investment properties are substantially higher than for owner-occupied single-family homes. The borrower may need six months of reserves on the subject property plus additional reserves on every other financed property in their portfolio. Borrowers who deplete their liquid assets for the down payment may not have sufficient reserves to satisfy the requirement, resulting in a denial even though they meet income and credit standards.

  • Ignoring the impact of LLPAs on multi-unit investment property pricing

    Loan-level price adjustments for investment properties and multi-unit properties are cumulative. A borrower purchasing a four-unit investment property with a 700 credit score may face LLPAs totaling 3% or more of the loan amount , which translates to a significantly higher effective interest rate compared to an owner-occupied single-family purchase. Borrowers should request a full LLPA breakdown from their lender before committing to the transaction.

Documents You May Need

  • Current lease agreements for all occupied units (if the property has existing tenants)
  • Appraisal with rent schedule and income approach analysis
  • Two months of bank or asset statements demonstrating sufficient reserves
  • Two years of tax returns (if rental income from other properties is used for qualification)
  • Proof of property management experience or plan (some portfolio lenders require this)
  • Purchase contract specifying the number of units and intended occupancy

Frequently Asked Questions

Can I use an FHA loan to buy a fourplex as an investment property?
No. FHA loans require the borrower to occupy one of the units as a primary residence. You cannot use FHA financing to purchase a 2-4 unit property as a non-owner-occupied investment. However, you can purchase a fourplex with FHA financing if you live in one unit and rent the other three, which is the house hacking strategy. You must occupy the unit within 60 days of closing and must intend to maintain it as your primary residence for at least one year .
What is the FHA self-sufficiency test?
The FHA self-sufficiency test applies to three- and four-unit properties financed with FHA loans. It requires that the property's total net rental income (from all units, including the owner-occupied unit at market rent, after applying a vacancy factor) be equal to or greater than the total monthly mortgage payment. If the property fails this test, the FHA loan cannot be approved regardless of the borrower's personal income .
How much rental income can I use to qualify for a conventional loan on a duplex?
For a conventional loan, the lender uses the appraiser's estimated market rent for the non-owner-occupied unit (or units), applies a 25% vacancy factor, and compares the resulting net rental income to the mortgage payment. If net rental income exceeds the payment, the surplus is added to your qualifying income. If net rental income is less than the payment, the shortfall is added to your monthly debt. You can use 75% of the estimated rental income to offset the payment, but not the full amount .
What down payment do I need for a 2-4 unit investment property?
Conventional loans for non-owner-occupied 2-4 unit properties typically require a minimum 25% down payment . DSCR loans may require 20-25% down depending on the lender and the property's DSCR. FHA and VA loans are not available for non-owner-occupied investment purchases. If you occupy one unit, down payment requirements drop significantly: 3.5% for FHA, 0% for VA, or approximately 5% for conventional on a two-unit property .
How do appraisals work for multi-unit properties?
Appraisals for 2-4 unit properties include both a sales comparison approach (comparing the property to recent sales of similar multi-unit properties) and an income approach (estimating value based on rental income and capitalization rate or gross rent multiplier). The appraiser also completes a rent schedule estimating the market rent for each unit. Comparable sales for multi-unit properties may be limited in some markets, which can make the appraisal process more complex and potentially result in a lower-than-expected appraised value.
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