FHA Loans Mixed-Use Properties Mortgage Guidelines

FHA Loans Mixed-Use Properties Mortgage Guidelines

In this blog, we will cover and discuss FHA loans mixed-use properties lending requirements and guidelines. FHA loans, those using mortgage guidelines set forth by the Federal Housing Administration, have been around in some form since 1934. The program was first introduced to promote homeownership for hard-working families with lower incomes who did not have a lot of money for the down payment.

The Mission and Role of HUD on FHA Loans Mixed Properties

The Mission and Role of HUD on FHA Loans Mixed Properties
The mission of HUD, the parent of FHA, was to provide some stability and universal guidelines banks could use to approve a loan application. In return, lenders will receive a government guarantee should the loan ever go into default. As long as the lender approved the loan using these guidelines and the borrowers planned to occupy the property as their primary residence, an FHA loan could be used. FHA loans allow lenders to lend homebuyers with only a 3.5% down payment with less than perfect credit.

FHA Loans Mixed-Use Properties Versus Residential Homes

FHA loans, being used as a primary residence, can finance a single-family home or a condo in a HUD-approved condominium project. But what about a duplex? HUD also allows for the financing of a duplex as long as the borrower occupies one of the units as a primary residence. The same goes for a 2-4 unit. The property is eligible for an FHA loan if the borrower occupies one of the four units.

FHA Loans Mixed-Use Properties Mortgages are Only For Owner-Occupant Properties

Occupying the property as a primary residence provides for the most competitive interest rates and still asks for a down payment as low as 3.5%. The FHA loan program is by far the most popular among the three government-backed mortgage loans. The other two are the VA and USDA loan options.

Buying and Using FHA Loans Mixed-Use Properties

But what about FHA loans and mixed-use properties mortgages? FHA loans and mixed-use property mortgages are one that can be considered both residential combined with commercial. Commercial property is one used for commerce. It’s a business and the owner provides products or services to the general public for profit.

Commercial FHA Loans Mixed-Use Properties Explained

Commercial mortgage loans are generally reserved for banks. Commercial loans are shorter-term loans in nature. Commercial loans will also ask for a larger down payment compared to an FHA loan. For someone who wants to open up a restaurant for example and wants to buy a $1.2 million property, the bank could ask for a down payment of say 20% to 30% of the sales price or even more, depending upon what the individual bank wants to see.

FHA Loans Mixed-Use Properties Up To 4 Units

FHA Loans Mixed-Use Properties Up To 4 Units
Let’s now say someone wants to buy a four-unit property that is listed in a commercial zone. The subject commercial property has approved residential properties as part of the four units. Maybe the first floor is a restaurant and the second floor consists of three residential units. This is considered mixed-use.

What are Commercial FHA Loans and Mixed-Use Properties Mortgages?

Now, when lenders look at a mixed-use property and have an FHA loan in their portfolio, they can see that three units are residential and one is commercial. HUD is okay with that. At first glance, it might appear the property is 25% commercial and 75% residential because one of the units is commercial and three residential. To be eligible for FHA loans for mixed-use properties, 51% of the square footage needs to be residential.

Square Footage Requirements On FHA Loans Mixed-Use Properties

FHA loans look at the total livable square footage of the property in addition to the number of units. Since FHA loans can be used to finance a 2-4 unit property, it qualifies. But it’s not the number of units but the total floor area of the property. In this example, if the entire first floor takes up most of the entire floor space, the floor space of the other three units must be measured.

Eligible Properties For FHA Loans Mixed-Used Properties

Let’s say the footprint of the building is 3,000 square feet and since there are two floors, the total livable square footage is then 6,000 square feet. In this example, the commercial space takes up half or 50 percent of the total livable area. Can this qualify for an FHA loan? Not quite.

Residential Versus Commercial Square Footage Ratio

According to FHA guidelines, “The non-residential portion of the total floor area may not exceed 49 percent. Any non-residential use of the Property must be subordinate to its residential use, character and appearance. Non-residential use may not impair the residential character or marketability of the Property. The non-residential use of the Property must be legally permitted and conform to current zoning requirements.”

Cannot Have Commercial Space Larger Than Residential Space

Cannot Have Commercial Space Larger Than Residential Space

This property is close to qualifying for the more favorable FHA loan but is just shy. However, this requires a closer look. An appraiser needs to inspect and measure the property which will provide a more exact square footage count.

The Ratio of Commercial Versus Residential Space Determined By Appraiser

Let’s say the appraiser did measure the first floor but showed the commercial portion of the first floor measured 2,500 feet with the other 500 feet reserved for shared space for the residential units as it relates to walkways and stairs. Now, the property is 41.6 percent commercial and 58.4 percent residential.

Mortgage Options For Buyers of Mixed-Use Properties

As far as commercial vs. residential space is compared, an FHA loan may be used as long as the borrower occupies one of the three residential units. Note, the borrowers and the property must still comply with other aspects of FHA qualifying. If a mixed-use property does qualify for an FHA loan, the homebuyer needs to seek a commercial loan with at least a 20% down payment. FHA loans for mixed-use properties is a great loan program because of the low down payment and lower credit requirements for FHA loans.

What Are FHA 203K Loans Mixed-Use Properties

If you are interested in rehabbing a home in order to create your dream home. Or if you are in the market to purchase a mixed-use property that is both commercial space and residential space. We will further cover and discuss this article regarding the FHA Mixed Use 203K.

Expert Mortgage Loan Officers on FHA 203k Loans

The team at Loan Consultants are experts in this area. We can make this deal happen for our borrowers.  Before we go into the mixed-use aspect of the FHA 203K, it is good to know the background of the standard residential FHA 203K loans. By understanding the basics of the FHA 203k loan program, borrowers will get a better understanding of how this loan works if they choose to go down this path.

Standard FHA 203K Loan For Mixed-Use Properties

Standard FHA 203K Loan For Mixed-Use Properties

In an effort to make sure our borrowers are in a complete understanding of this program, it is wise that we go over the residential FHA 203k loan before discussing the 203K Mixed-Use loan program.  For the standard FHA 203K is at its simplest terms a “fixer-upper” loan you can buy a home that needs some work. You can get the construction costs rolled into your acquisition loan. Everything will be included in one payment per month at competitive rates.

Using FHA 203k Loans For Buying Fixer-Uppers

If you use the FHA 203k loan program, you will not have to worry about costly Home Equity Loans or Home Equity Lines of Credit (HELOC). If you are not a new homebuyer and have an existing home, you are also eligible for this loan as a refinance option to take some money out. With the construction funding, you can make the repairs and upgrades to your home that you desire.

Types of FHA 203k Loans

There are also 2 types of FHA 203K Loans and they are the Standard 203K and the Streamline 203K.  If you would like to go with the Standard 203K there is a minimum loan amount of $5,000 and you will not be allowed to borrow more than the future value of your home after the renovations have been completed.

Renovation Funding Needs To Be Used For Rehab

All money requested within the loan must be used for your construction projects as the 203K loan program doesn’t allow you to cash out.  The Standard 203K loan will allow for must construction projects large and small which can include structural changes and additions.  For the Streamline 203K you are limited as a borrower to a $35,000 maximum renovation amount and there are also restrictions to the types of projects you can do.  Some examples of projects that are approved for the Streamline 203K are HVAC repair, roof repair, patios, porches, and basement finishing.

203k FHA Loans Mixed-Use Properties

Hidden behind the Standard 203K and the Streamline 203K is the FHA Mixed Use 203K.  This is a little-known and little-used loan program out there that can assist buyers who are looking to purchase and fix up a property that has both commercial and residential space with it.  The one main requirement for this loan program is that the borrower must also be the one who occupies the residential space in the building.

Is There Any Square Footage Limit on the Commercial Space?

Is There Any Square Footage Limit on the Commercial Space?
There aren’t any limits to the commercial space in the building. The commercial space can be leased to a new business or an existing business from prior to when the building was sold.  Another extremely important guideline in all of this is the ratio of residential space and commercial space within the building.

51% To 49% Ratio On Commercial Versus Residential Space

According to the FHA Guidelines that can be found in the HUD 4000.1 Handbook, you will see that there must be at least 51% of the square footage used as residential space and no more than 49% of the space used for commercial space.  There is also a limit to the number of units these buildings can have and per FHA Guidelines the property is limited to having 4 units in total.  For example, this would include a commercial storefront on the first floor and up to 3 apartments above it.

Issues With Finding Right Spec Mixed-Use Building To Meet HUD Guidelines

In most situations, you are going to find buildings that are at least 2 stories in height where the commercial space will use the ground floor and the residential space will be upstairs.  Now if you are questioning what would happen if you thought the building was split 50/50, there are very slight variables that can be used in order to shift the residential space to at least the 51% mark and it all could come down to a staircase.

Other Building Requirements and Guidelines

Now you’re probably wondering how a staircase can be the tie-breaker of square footage in this situation and the logic is quite simple.  If you have commercial space on the first floor, why would they have the need to use the residential space upstairs?  There is no need for them to use this staircase so that the minimal amount of square footage that is used is considered for the residential space and not the commercial square footage.  This would tip the square footage into the residential’s favor and thus satisfy the 51/49 square footage split.

Benefits of Mixed-Use Residential and Commercial Properties

As you can see for borrowers who either want to run their business in the same place that they live or have the idea to rent out the commercial space to offset their loan costs, this loan makes a great deal of sense.  These properties are in high demand in larger metropolitan areas where the mixed-use property is very popular along busy city streets.

Living in Same Place as Workplace

Living in Same Place as Workplace

FHA Mixed Use 203K can assist you in becoming a landlord to a commercial business or allow you to get your residential and business loan all in one package.  As a borrower, you need to make sure there is a minimum investment in rehab work to be done with the residential part of the property.  You can’t just use the 2017 FHA Mixed Use 203K to purchase a property and leave it at that.  With the rehab funds that you can obtain, you are able to put in a new kitchen, new staircase, new walls, or any other work you can think of.

FHA Mixed Use 203K Loan Qualification Requirements

When looking to qualify for a 2017 FHA Mixed Use 203K, the standard qualifications for these loans are at least a 620 FICO score in order to secure this loan with a 3.5% down payment.  For borrowers that fall between 580-619, higher down payments may be required and will need to be evaluated on a case by case basis.  Since 203K loans are seen as a riskier proposition, the debt-to-income ratios for these loans are normally capped between 45-50% and will not get near-standard FHA Loans of 56.9%.  As with any construction project, there is a definite risk involved and FHA takes this into consideration accordingly.

Qualifying For FHA Loans Mixed-Use Properties

If you are looking for an FHA Mixed-Use 203K loan, then you have come to the right place. We are at the forefront of getting these mixed-use loans approved and funded to borrowers.  If you feel this loan suits you, you need to reach out today to Loan Consultants Mortgage at APPLY NOW

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