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 provide some stability and universal guidelines banks could use to approve a loan application and in return 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, being used as a primary residence, can finance a single family home or a condo in an approved condominium project. But what about a duplex? FHA 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. Occupying the property as a primary residence provides for the most competitive interest rates and still ask 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.
But what about a mixed use property? A mixed use property is one that can be considered both residential combined with commercial. A 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 mortgage loans are generally reserved for banks and are shorter term in nature. Commercial loans will also ask for a larger down payment compared to an FHA loan. 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 30% of the sales price or even more, depending upon what the individual bank wants to see.
Let’s now say someone wants to buy a four-unit property that is listed as being in a commercial zone but 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. 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. FHA loans are 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.
FHA loans look at 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. 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.
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.”
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. 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. 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 it should be one of the first mortgage options explored due to the lower down payment needed, qualifying and interest rates. We’re experts in mixed-use financing. Let’s explore the FHA option before you consider others.
The author, Matt Herbolich, MBA, JD, LLM NMLS #1649154, is a senior loan officer at USA Mortgage, a division of DAS Acquisition Company, LLC NMLS# 227262. Contact Matt Herbolich, MBA, JD, LLM for your Real Estate and Mortgage Questions. USA Mortgage is a direct lender with no lender overlays on Government and Conventional Loans. Mr. Herbolich can be reached 7 days a week at 888-900-1020 by phone, on his cell at 786-390-9499 by either phone or text, or by email email@example.com.