FHA Loans in 2024: Requirements, Rate, Qualification, Types, Benefits and Limitations

Like many people interested in owning a piece of commercial real estate, you might wonder: Can you use an FHA loan to buy a commercial property?

Yes, you can use an FHA loan for commercial properties in certain situations, depending on the property's use and whether the owner resides there.

This blog will delve into the specifics of when FHA commercial loans are allowed and outline the FHA loan requirements for 2024.

Before we proceed, it’s important to note that while this blog mentions “FHA commercial loans,” these programs are still designed for residential purposes —specifically multifamily properties with several units. The FHA does not offer loans for purely commercial properties like office buildings or storefronts.

Why exactly is an FHA loan?‍

An FHA loan is a mortgage insured by the Federal Housing Administration (FHA), a government agency that protects lenders if the borrower defaults.

Contrary to popular belief, the FHA does not directly lend money to borrowers but instead ensures the loan is issued by a participating lender(such as a bank or credit union). This insurance allows lenders to offer more favorable terms to borrowers, such as lower down payment and credit score requirements.

That said, FHA loans still require a minimum credit score and other eligibility requirements, which may vary among lenders. Shopping around and comparing FHA lenders can help you find one that best meets your needs.

The basics of FHA commercial property loans

The FHA backs mortgages for a broad spectrum of commercial projects because its goal is to foster housing for low-income, elderly, and disabled individuals. These FHA multifamily loans are accessible to for-profit and non profit organizations, though some programs are exclusive to nonprofits.

Specifically, the FHA offers loan programs for multifamily properties with more than four units, often referred to as "FHA multifamily loans" or "FHA Section 223(f) loans".

These programs differ significantly from the FHA single-family home loan program. Let's break down the key distinctions:

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Single-family vs. multifamily homes

While duplexes, triplexes, and quadruplexes may seem like multifamily dwellings, the FHA still considers them “single-family” homes if the borrower lives in one of the units as their primary residence for at least a year. These loans are not intended for pure investment purposes in smaller multifamily properties.

Mixed-use properties

‍Buildings combining residential and commercial spaces may qualify for an FHA loan if they are determined as "primarily residential" by the FHA. For instance, a building with commercial space on the first floor and apartments above could be eligible for an FHA commercial loan.

FHA multifamily loans

‍These loans are designed for investment purposes in multifamily properties with more than four units. They typically have different requirements and terms than FHA loans for single-family homes, offering advantages like lower down payments and longer loan terms.

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When can commercial properties qualify for FHA loans?

The FHA insures commercial loans for three types of multifamily residential units, available to both for-profit and nonprofit entities:

• Healthcare facilities
• Purchase or refinancing of existing multifamily rental housing (Section 207 and Section 223(f))
• Rental and cooperative housing (Section 221(d)(3) and Section 221(d)(4))

Special programs are also available for nonprofits in elderly housing (Section 202) and special needs housing (Section 811).

What do you know about the FHA Rental Property Loan Program for Multifamily Properties?

Loan program Section 207/223(f) facilitates acquiring and refinancing existing multifamily rental properties. To qualify:

• Properties must have at least five units, each with a full kitchen and bath.
• These units should have been completed or significantly rehabilitated for at least three years before applying for mortgage insurance and must not require substantial repairs.
• Any critical repairs must be addressed before closing, while non-critical maintenance can wait until after.      

These commercial loans offer longer mortgage terms (up to 35years) and lower interest rates, thanks to FHA insurance, which reduces the lender's risk.

The lenders — not the FHA — agree to these loans. The FHA's role is to provide mortgage insurance and minimize the lenders' risks.

The bottom line: FHA commercial loans come with caveats

While the FHA backs mortgages for various properties, including single-family, multifamily, and residential care facilities, it does not support entirely for commercial investment property loans. But if you’re interested in using an FHA loan to fund a multifamily property, keep reading to learn the requirements you must fulfill to qualify.

FHA Loan Requirements for 2024

Key insights: 

• Mortgage insurance is required for FHA loans (to protect the lender in case you default on the loan). However, you can cancel the insurance after 11 years if you have a down payment of at least10% and the property value increases sufficiently.
• All FHA-backed properties must undergo an appraisal to ensure they meet government health and safety standards.
• The minimum down payment for an FHA loan is 3.5% if your credit score is 580 or higher. However, if your credit score falls between 500 and 579, you'll need a minimum down payment of 10%.
• While a debt-to-income ratio of50% or below is ideal, the FHA may consider applicants with higher percentages in specific situations.     

 
Qualifying for an FHA loan is often easier than qualifying for conventional mortgage loans, especially if your credit history is less than stellar or you're rebounding from bankruptcy.

Notably, FHA loans don't exclusively cater to first-time homebuyers. However, their low down-payment requirements (paired with flexible standards for credit scores and existing debt) make them popular with this group.

In contrast, while conventional mortgages might offer similar low-down-payment schemes, they require more substantial credit scores and more favorable debt-to-income ratios than the FHA asks for.

Here's a deeper dive into the essential FHA loan requirements for2024.

Minimum Credit Score: 500

FHA loans extend a hand to borrowers with lower credit scores by setting the entry bar at 500. This inclusivity is one of the many reasons first-time buyers gravitate towards FHA loans.

That said, while the FHA sets these minimums, lenders often impose stricter criteria to mitigate risk. Raising your credit score before applying for a loan is still a good idea. This opens doors to better terms, like lower down payments, more lenient existing debt allowances, and favorable mortgage rates.

Minimum Down Payment: 3.5%

The FHA's minimum down payment varies with your credit score. With a 580 score or higher, you only have to pay 3.5%. If your score is between 500 and 579, the down payment requirement increases to 10%.

Debt-to-income ratio: 50% or less

Your debt-to-income ratio (DTI) is a critical factor that lenders evaluate when securing any mortgage, and FHA loans are no exception. The debt-to-income metric helps lenders gauge your ability to manage monthly payments along side your debts. A lower DTI not only improves your loan approval chances but also indicates better financial health.

The FHA uses two key ratios to assess your ability to repay a mortgage:

Total Mortgage Payment to Effective Income Ratio (PTI)

This ratio compares your monthly mortgage payment to your gross monthly income. A PTI of up to 40% is acceptable if you have a good credit score and financial standing.

Debt-to-Income Ratio (DTI)

This ratio considers a broader picture, calculating the percentage of your gross monthly income going towards all debt payments (including your future mortgage, credit cards, and other loans). The FHA generally sets a debt-to-income limit of 50% for borrowers with a minimum credit score 580, but they may consider exceptions in certain situations.

Additional points to remember:

• Some lenders might approve FHA loans with higher DTIs in rare cases, but this usually requires more vital compensating factors like a significant down payment or substantial assets.
• It's essential to check with individual lenders about their specific DTI requirements, as they may vary slightly.

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Income requirements

The FHA does not set a minimum or maximum salary requirement. However, you must demonstrate consistent income and financial responsibility. Here's what they look for:

• Consistent income - A two-year history of stable income through employment, education, or military service is essential.
• Credit history –If you don't have a traditional credit score, evidence of on-time payments for rent, utilities, and other bills can be considered.
• Clear financial standing - To qualify, you must be clear of delinquent federal debts or judgments.
• Cash gift verification - If you received down payment assistance, you'll need written proof from the donor to verify the source of the funds. 

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Loan limits: 498,257 to $1,149,825

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For 2024, FHA loan limits span from a floor of $498,257 in low-cost areas to a ceiling of $1,149,825 in high-cost areas. These limits vary by county and reflect local real estate market conditions. You can quickly check the specific limit for any county on the HUD website to ensure you target properties within the allowable range.

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‍Documentation requirements

You need to prepare the following before applying for an FHA loan:

• A valid government-issued ID (such as a driver's license or passport)
• Your Social Security number
• Two years of pay stubs, W-2 forms, or tax returns to verify income
• Letters confirming the source and amount of gift funds, clarifying these don't require repayment.

Your FHA-approved lender will guide you through any additional paperwork needed for your application.

Inspection and property requirements‍

FHA loans come with specific property criteria to ensure the home is safe, sound, and a wise investment:

• The home must serve as your primary residence, with occupancy starting within 60 days post-closing for at least one year.
• Eligible properties include single-family homes, multifamily homes of up to four units (with one unit occupied by you, as mentioned earlier), and manufactured homes on permanent foundations.
• Investment properties are generally excluded, except for multi-unit buildings where you reside in one unit, as mentioned earlier.
• Properties must pass an FHA appraisal to verify they meet safety and health standards. Flipped homes bought and sold within 90 days typically don't qualify, with certain exceptions.

Mortgage insurance requirements

Knowing the FHA will reimburse them if a borrower defaults, lenders are more willing to offer FHA loans to borrowers with lower credit scores or smaller down payments. This is why the FHA is often called "mortgage insurance."

The amount of insurance you must pay is determined based on the length of your mortgage, the total cost, and your down payment.

• Upfront payment — At closing, you will pay an upfront mortgage insurance premium of 1.75% of your loan amount, which you can roll into the mortgage.
• Monthly payments – If your down payment is 10% or less, you will be required to make monthly mortgage insurance payments for the life of the loan. If your down payment is 10% or more, you must pay monthly mortgage insurance payments for 11 years.

Unlike private mortgage insurance, you cannot cancel FHA mortgage insurance upon reaching 20% equity.

Once you've built sufficient equity, you may refinance into a conventional loan to eliminate these costs. However, if you choose this route, you’ll need to meet new requirements and pay additional fees and closing costs.

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Foreclosure waiting period: 3 years

You must wait three years before applying for an FHA loan, except for extenuating circumstances like severe illness.

Post-bankruptcy applicants need to show improved financial stability. They typically wait two years after Chapter 7 or at least one year after Chapter 13 bankruptcy before applying.

So, should you use an FHA loan to fund a commercial property?

Thanks to the less stringent qualification criteria compared to conventional mortgages, FHA loans are appealing to many borrowers, especially those with lower credit scores or limited funds for down payments.

If you’re a first-time home buyer, you may even be able to combine an FHA loan with assistance for down payments or closing costs from state-run programs. Repeat buyers and homeowners interested in refinancing can also take advantage of FHA loans, provided they satisfy the necessary eligibility criteria.

However, FHA loans are generally not suitable for obtaining purely commercial properties. Here’s why:

• As said earlier, FHA loans are designed to promote homeownership. They are primarily meant for single-family homes, owner-occupied multifamily buildings (up to four units), and particular care facilities.
• The commercially zoned portion of a mixed-use property cannot exceed 20% of the gross revenue or 25% of the total square footage. This significantly limits its usefulness for many commercial properties.
• The borrower must live in one of the units, which isn't feasible for purely commercial ventures.

While technically possible in specific scenarios with mixed-use properties that meet strict criteria, FHA loans are not generally recommended for commercial property acquisition. It is advisable to explore other options specifically designed for commercial real estate financing.

For financing a commercial property like a multifamily home where you plan to reside in one unit, here are some alternatives to consider:

• Conventional Commercial Real Estate Loans - Banks and other lenders offer these loans to finance commercial properties. They typically require a larger down payment (around 20-30%) and have higher interest rates than FHA loans. However, they offer more flexibility regarding property type, use, and loan terms for commercial real estate loans.
• Small Business Administration(SBA) loans - The SBA loans offers various loan programs for small businesses, including real estate acquisition and improvement. These loans can be attractive due to their lower interest rates and longer terms than conventional commercial loans. However, they come with stricter eligibility requirements, including business size and activity limitations.
• Portfolio Loans - Lenders offer loans based on the borrower's overall financial strength and real estate portfolio (rather than solely focusing on the specific property being financed). This can be advantageous for experienced investors with a strong property management record. However, they typically require significant experience and strong financials to qualify.

• Hard Money Loans—These are short-term,  commercial hard money loans from private lenders for quick financing. They often have higher interest rates and stricter terms than other options, but they can help close deals quickly or finance properties that don't meet traditional lending criteria.

If you want to explore different financing options for your commercial property purchase, contact us at Capital Investors Direct. We provide solutions for projects of all sizes.

Whether you’re interested in bridge loans, hard money loans, construction loans, jumbo loans, stated income loans, permanent loans, FHA Loans, or SBA loans, we have you covered.

We use cutting-edge financial technologies and various program types (including CMBS, Life Insurance Group loans, and a broad network of Independent Private Lenders) to design comprehensive suites of investment solutions tailored to different commercial real estate financing needs. Talk to us about your project today.