Mortgage Resources

Mortgages for Landlords Differ from Single-Family Home Loans

Getting a mortgage to buy a single-family home is a complicated process. Getting one to buy a duplex, triplex or four-plex is harder, even if you plan to live there yourself. It can, however, be worthwhile when you have tenants who help you pay off the mortgage on your building.

Before buying a "multifamily dwelling unit" and becoming a live-in landlord, you need to know that the requirements -- down payment, interest rates, income, debt ratio, whether or not you have tenants, and even your experience as a landlord -- to get a mortgage for that kind of housing are different, explains Ray Walter, president of the Walter Mortgage Group in Austin, Texas.

And that's for buying multifamily units where the landlord lives in one of them. Getting a mortgage to buy multifamily units where you do not intend to live is even harder and more expensive. Lenders prefer to see the landlord on the premises because owners take better care of homes than renters do, Walter says. They also tend to make repairs more quickly and thoroughly than absentee landlords or property management firms do.

As with any other home purchase, the larger the down payment for a multi-family home, the easier it is to get a loan and a good interest rate. If, for example, you have an 'A-paper' credit rating, and 'you want to buy a single-family home with 5 percent down, you'd probably pay 5.875 to 6.125 percent in interest. On a duplex, you're looking at about half a percentage point more, and the lender typically wants to see 10 percent to 20 percent down.

'There are programs you can get into that let you put less money down, but the rates are higher," Walter says. "With 5 percent down on a duplex, you'd be looking at the mid-7-percent interest range.' For a triplex or a four-plex, which most lenders would treat the same, he says you would expect to pay an eighth- to a quarter-percent more in interest.

It is possible to buy a multifamily unit 'with no down payment, and even with a no doc, or stated income, loan," he adds. "If you do, however, interest rates could climb into the 7.5-percent range, and that's for someone with good credit.' If there are credit problems, the interest rate will be even higher.

The biggest issue, however, is not the credit rating or the down payment. It is your ability to make the monthly payments. Your tenants pay you, and you pay the mortgage company. If there are no renters, and rental units do sit empty at times, you still have to pay the mortgage. Lenders assume that some of the units - the ones that you do not personally occupy - will be vacant part of the time. It also costs money to maintain an apartment building or prepare a vacated unit for the next tenant. That is why a lender will normally give you credit for only 75 percent of the rental income you should be able to collect.

Here's how it works. 'In Austin, you can get a duplex for $180,000. Each side would rent for $800. Let's say the monthly payment is $1,600; that works out to be $800 from the landlord and $800 from the tenant.' Walker says the buyer(s) would have to show that they have enough income to make that entire $1,600 payment. Walker said, however, that sometimes he 'can then give him credit for 75 percent of the potential rent.' Since 75 percent of $800 is $600, the lender would subtract that from the total amount the buyer would have to qualify for. So instead of showing that they could make a $1,600-a-month payment, the buyers would only have to show that they could make a $1,000-a-month payment. Whenever the rental unit sits unoccupied, however, they have to actually make that $1,600-a-month payment. And, as we'll see later, sometimes Walter cannot give them that 75 percent credit.

He points out that the rental rates the lender will use are the ones the property appraiser calculates after looking at what comparable units rent for in the same or similar neighborhoods. In many cases, however, landlords wind up paying less -- often far less -- than their tenants do. This can help them build a cash reserve to cover those months when units are empty and to pay for required maintenance and repair costs.

In Walter's example of a duplex where each unit rents for $800, if the owners were able to make a big enough down payment to lower the monthly payment to $1,200, their share of the mortgage would be only $400 a month, except, of course, for those months when the rental unit was empty. And rents do rise, but fixed-rate mortgage payments do not.

Experience also is a key factor when financing multifamily units, Walter says. If the buyers have no experience as landlords or property managers, some lenders will not give them that 75 percent credit unless the rental units are already occupied when they buy the building. Lenders might also want to see lease or rental agreements showing that the tenants plan to live there for a while. If the lenders don't get the proof they want, they might require that the buyers' income be high enough to let them make the entire payment themselves.

'Most lenders consider you a 'seasoned' landlord after two years. If you are 'seasoned,'' Walter adds, 'the lender will treat the property as rented and let you have the 75-percent credit."

A common question that Walter hears is: Once I have the loan, how long do I have to live there? At what point can I move out and make the entire unit rental property and become an absentee landlord? 'Technically,' he says, 'it is a year. You have to say you are going to be there for a year.'

But if you are thinking about buying a duplex, triplex or four-plex, how long you plan to stay there as a live-in landlord is a minor point. The biggest issue is getting the loan to buy the building. Then, you can start finding tenants to help you pay the mortgage.


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