With the continued rising cost of purchasing a home now coupled with rising interest rates, many prospective homebuyers goal of purchasing a home has become very bleak. I have encountered individuals, single parents, young adult college graduates with insufficient coupled with massive Student Loan debt have their dreams of purchasing a home dashed which is what prompted me review both HUD/FHA and Fannie Mae loan guidelines to ensure this transaction structure is allowable to offer the “Duplex Option” to many of my borrowers. This option allows you to purchase a duplex (2-unit) property, live in one unit and rent out the other unit whereas 75% of the fair market rent can be used as “qualifying” income to qualify for the mortgage loan. Even if you purchase the property with both units vacant, the fair market rent via a Rental Analysis to can be used to aid you in qualifying for the loan to purchase the property. The final determination of the Fair Market Rent for that structure is determined by the appraiser and is noted within the appraisal report which is how the underwriter determines final figure to be used as Fair Market Rent. You real estate agent will perform his/her Due Diligence during the property search to pre-determine that amount as well. In most cases, the current rent amount being collected by the current owner of the property is listed in the MLS (Multiple Listing Service) details for that specific property.
Over the past 2 years I have placed quite a few homebuyers in home using this transaction structure. Many borrowers were concerns were relative to the occupancy requirements if they wanted to move into a Single-Family Residence later as to whether they would have to sell the property and not wanting be a Property Manager. Both HUD/FHA and Fannie rules relative to owner occupancy is that you must move into the property within (60) days after closing escrow and live in the property for at least (12) months. As for the not wanting to be a Property Manager, most of my past clients hired a licensed Property Management Company to take on this task in which their cost is relatively minimal in which the receive 8-12% of the rental income collected as their fee. Their role will be to locate, screen and place a tenant in your unit, collect rent from the tenant and have all direct communications with the tenant relative to the property. Most of my borrower opt to not advise their tenant they own the property to keep the relationship arms-length between themselves and the tenant. As more and more Senior Citizens who are retired, seeking to down-size as well as seek supplemental income to their retirement income, they are also explore this option as well. Below are scenarios based on recently closed transactions:
Case Scenario #1:
The borrower is seeking to purchase a $250K property using an FHA mortgage loan at 3.75% interest rate with a 3.5% down-payment requirement. The borrower’s gross monthly income is $5700 with a monthly debt payout of $1007/mo per his credit report liabilities listed along with a total monthly proposed monthly mortgage payment of $1889.00 which puts his DTI ratios at 51% which exceeds FHA DTI limit of 50%. Therefore, the options the borrower has to qualify for this loan is to pay down or pay off debt or seek a less expensive home to purchase.
The other option would be for the borrower to seek to purchase a 2-4 unit property whereas he will live in one of the units and rent out the others. If this borrower were to seek to purchase a duplex in the amount of $325K, the Fair Market Rent for the un-occupied unit would be approximately $1250/mo. This rental income in this scenario is considered “qualifying income” per FHA loan guidelines which can be used to reduce his DTI ratios to qualify for a loan to purchase this property. The total monthly payment on this transaction scenario is $2381/mo, in which his DTI is now reduced to 48% which is within the DTI limits of FHA’s loan guidelines in which now the borrower qualifies for a loan to purchase this $325K property whereas after the receipt of rental income each month of $1250 his net mortgage payment is now $1131/mo. This a very attractive option because the net mortgage amount is less than the $1500 month rent the borrower is currently paying to rent a house and now he’s paying $369/mo less than renting and he owns the property.
Case Scenario #2:
The Duplex Option can be used by purchasing the duplex joint with a friend or relative who can also meet the loan guidelines. This option is also popular because it allows two parties to split the cost of purchasing a property as well as aid each other in meeting the DTI (Debt-To-Income) ratios requirement whereas maybe each party cannot qualify to purchase a SFR (Single Family Residence) alone.
Two sisters who are seeking to purchase a home seek to purchase a SFR but is unable to do so because they exceed the DTI ratio requirements for the loan due to insufficient income and/or too much debt. By exploring the Duplex Option, they are able to qualify because their combined incomes keep them within the DTI ratio requirement of the loan. Initially, both each sought to qualify for properties priced at $350K but did not qualify. However, by deciding to purchase a duplex priced at $450K, it allowed them to qualify and be pre-approved for this purchase structure because of their combined incomes. In addition, they were able to obtain a mortgage payment whereas each of their portion of the payment was either equal to or less than the rent they were paying individually. It also saved them on the Escrow Deposit requirement, down-payment and closing cost because they were able to equally split these cost associated with purchasing a home.
The Duplex Option could be a cost-effective way for those borrowers recently declined and/or did not qualify for mortgage loan on a property due to insufficient income and/or DTI (Debt-To-Income) ratios that exceeded the loan guidelines limits. For those who qualify, some of our Down-Payment Assistance programs are available to cover the 3% -3.5% down payment requirement. For more information on this transaction structure and whether it’s right for you, please contact me at Elite Mortgage at (916) 708-0235 for a Free NO obligation consultation.
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