How To Qualify For FHA Loans For Mix Used Property

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How To Qualify For FHA Loans For Mix Used Property

This Blog On How To Qualify For FHA Loans For Mix Used Property Was Written By Matt Herbolich MBA JD LLM CMLP NMLS NMLS 1649154 of The Gustan Cho Team at USA Mortgage 

If buyers aren’t particularly careful, financing a mixed-use property can get expensive.

  • A mixed-use property is one where there is more than one unit in the building with a mix of both residential and commercial space.
  • If for example a buyer contacts his bank the bank might view a mixed-use property as commercial in nature, even though there is a residential unit on the property.

The result?

  • Financing is then considered commercial, not residential which means more down payment, less favorable financing terms and higher rates.
  • But in many urban and suburban areas mixed-use properties can be more common and both residential and commercial exist rather well together.
  • FHA recently adjusted its policy with regard to mixed-use financing and today it is much easier to finance a property even though the ratio of commercial to residential is higher than what a conventional loan will allow.

For such properties, the previous guideline allowed for up to 25% of livable space be allotted for commercial purposes.

  • For example, there is a four-unit property in a shopping area and the unit facing the street is an office for an accountant.
  • If the total square footage of the property were 8,000 square feet, no more than 25% of that space, or 2,000 square feet could be commercial.
  • If the accountant’s office measured out at 2,500 square feet, an FHA loan could not be used.
    FHA loans today are some of the most competitive loans to finance a primary residence among available financing resources.
  • FHA loans are typically easier to qualify for based upon credit and income guidelines when compared to low down payment conventional loans.

Residential Versus Commercial Loans: FHA Loans For Mix Used Property

  • Lower down payments as well when compared to conventional loans and certainly more competitive than commercial financing.
  • But the 25% limit kept an FHA loan at bay. The new limit for 2017 is now 49% of the total floor area, not 25%, almost twice the previous limit.
  • The Department of Housing and Urban Development, or HUD states that,
  • “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.”

Advantages Of FHA Loans

  • There are two key phrases here.
  • The first requires the property to primarily residential in nature and look like a residential property.
  • That’s the “character and appearance” remark.
  • The second refers to the marketability of the property.
  • Non-residential use may not impair the…character or marketability of the property.
  • This is then a judgment call on behalf of the appraiser who must satisfy the lender’s requirement to follow FHA guidelines.

Taking Advantage Of FHA Commercial Mixed Used Financing Program

  • For example, does the property look residential in appearance?
  • That might be a difficult call if there is a large sign easily visible from the street announcing the fact there is an accountant’s office at the address.
  • Yet if the property is similar in appearance to other residential properties in the area the appraiser could feel comfortable making that call.
  • Marketability refers to whether or not the property would sell in an open market under a non-distressed situation and if so how long would it take for the property to sell?
  • As with all FHA loans, an independent appraisal is an important part of the FHA loan file whether the subject property is a single family residence, a condo or in this instance a mixed-use property.

Appraisal And Market Value

  • The appraisal must contain records of recent sales of similar properties in the area along with photos, addresses and adjustments.
  • If the mixed-use property is somewhat unique and there aren’t any mixed-use properties in the area, the appraiser may have a difficult time finding similar sales.
  • However, when developers begin building in a specific area they must follow established building codes and if the zoning requirements do in fact allow for mixed-use properties then the likelihood that there is more than one such unit is high.
  • Recall as well that FHA loans can only be used to finance a primary residence and cannot be used to buy and finance a second home, vacation home or an investment property.

Rental Income: FHA Loans For Mix Used Property

  • However, even though there would be rental income coming from the units as long as the buyer occupies one of the units the property is considered owner occupied, even though the owner is theoretically taking up just 25% of the total space.
  • If the commercial space in an 8,000 square foot unit took up 45% of the area, the accountant’s office would be 3,600 square feet.
  • If the three remaining units were of equal size, the primary residence would be around 1,450 square feet.
  • These properties aren’t all that common compared to other commercial units but when there is such a property that meets FHA’s new guidelines, this loan program is hard to beat.

About The Author Of FHA Loans For Mix Used Property: Matt Herbolich

Matthew Herbolich is the author of this article FHA Loans For Mix Used Property. Matt Herbolich MBA JD LLM CMLP NMLS 1649154 is the editor in Chief for Loan Consultants  and senior writer for Gustan Cho Associates . Matthew Herbolich is an expert in the real estate and lending field and is a licensed mortgage loan originator licensed in multiple states. He is a guest speaker and mentor to many real estate and mortgage professionals and his passion is to help families make the their dream of making their dream of making their goal of home ownership become a reality. We are proud to have Matt be a guest writer at California Loans. Stay Tuned for more articles in days and weeks to come.

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