Frequently Asked Questions:
Common questions from first-time buyers of 2-4 unit owner-occupied properties
These are common questions buyers ask before purchasing a 2, 3, or 4 unit property to live in and rent out. The answers below are general information based on the official sources listed. Rules and loan programs can change, and your situation may be different, so confirm current details with your lender, a CPA, or an attorney before making a decision.
Do I have to live in the property if I buy a 2-4 unit building?
If you use certain loan programs, yes. FHA loans require at least one borrower to occupy the property as a primary residence within 60 days of closing and to live there for at least one year. Fannie Mae HomeReady and Freddie Mac Home Possible loans for 2-4 unit properties also require owner-occupancy. After the required period, you are generally free to move out and rent all units. Confirm the exact terms with your lender.
How much down payment do I need?
It depends on the loan program and your income. It can be as little as 3-5%. Freddie Mac Home Possible allows down payments as low as 5% on owner-occupied 2-4 unit properties for borrowers who meet income limits, generally 80% of the area median income. FHA and standard conventional loans have different requirements. A lender can tell you which programs you qualify for and what down payment applies.
Source: Freddie Mac, Mortgages for 2- to 4-unit Properties; CFPB, Your Down Payment Decision
Will rental income from the other units help me qualify for the loan?
In many cases, yes. Lenders offering owner-occupied 2-4 unit financing generally allow projected rental income from the units you won’t live in to count toward your qualifying income, subject to program rules. Ask your lender exactly how much of that income they will count and what documentation they need.
Source: Freddie Mac, Mortgages for 2- to 4-unit Properties
What is PMI, and will I have to pay it?
Private mortgage insurance (PMI) protects the lender, not you, if you stop making payments. It is generally required on a conventional loan when your down payment is less than 20% of the purchase price.
Source: CFPB, What Is Private Mortgage Insurance?
Do I need a home inspection?
Yes. HUD recommends a full inspection before you buy, covering the structure, roof, electrical, plumbing, and other major systems. For a multi-unit property, make sure the inspection covers every unit and any shared systems, not just the unit you plan to live in.
Source: HUD, For Your Protection: Get a Home Inspection
What if the property was built before 1978?
Federal law requires the seller to disclose any known lead-based paint hazards and provide you with the EPA’s lead hazard information pamphlet before you complete the purchase. Ask for this disclosure in writing as part of the transaction.
Source: EPA, Real Estate Disclosures About Potential Lead Hazards
What fair housing rules do I need to know before I rent out the other units?
The federal Fair Housing Act prohibits discrimination based on race, color, religion, sex, national origin, disability, and familial status (households with children) in renting or selling housing. This applies to how you advertise units, screen applicants, and treat tenants. Many states and cities add further protections, so check local law as well.
Source: HUD, Fair Housing Act Overview
How does owning a rental unit affect my taxes?
If you live in part of a building and rent out the rest, IRS Publication 527 explains how to divide income, expenses, and depreciation between the part you live in and the part you rent. This is a good topic to review with a CPA, since the numbers depend on your specific situation.
Source: IRS, Publication 527, Residential Rental Property; IRS, Rental Income and Expenses — Real Estate Tax Tips
What closing costs should I expect?
Closing costs generally include loan origination fees, appraisal fees, and title insurance, among others. Recent CFPB data put the national median closing cost figure at $6,000, though your actual cost depends on your loan size, location, and lender. Ask your lender for a Loan Estimate early so you can budget accurately.
Source: CFPB, What Fees or Charges Are Paid When Closing on a Mortgage and Who Pays Them?; CFPB, What Is Owner’s Title Insurance?
What’s the difference between an appraisal and a home inspection?
An appraisal is a written opinion of what the property is worth, used by your lender to confirm the loan amount is appropriate. A home inspection is a physical evaluation of the property’s condition. You need both, and they serve different purposes.
Source: CFPB, What Are Appraisals and Why Do I Need to Look at Them?; HUD, For Your Protection: Get a Home Inspection