What Is an FHA Commercial Loan?

An FHA commercial loan is a mortgage loan insured by the Federal Housing Administration (FHA) and used to finance a commercial property. Only an FHA-approved lender or bank can grant it to first-time homebuyers.

Residential Multifamily Loans

You can use residential multifamily loans to fund the acquisition or refinance of residential properties with two or more units like duplexes, townhouses, or apartment complexes. You can seek these loans from FHA-approved banks, credit unions, and other financial organizations.

These loans can be used by both commercial real estate businesses and private investors.

While there are different underwriting processes and terms involved, residential multifamily loans are like conventional residential mortgages. They have different repayment terms, usually ranging from 15 to 30 years.

Commercial Multifamily Loans

If you’re looking for a way to acquire, build, or rehabilitate a multifamily property with more than four residential units, you can use a commercial multifamily loan for funding. This property can include townhouses, apartment complexes, and any other type of multifamily housing.

When you seek a commercial multifamily loan from a lender, they will evaluate your application based on several important characteristics, like your credit score, debt-to-income ratio, rental revenue history, occupancy rate and cash flow, and more. They may also inspect and evaluate the property for the loan underwriting procedure.

Qualifying for a Commercial Property for FHA Financing

Usually, commercial properties don’t receive FHA financing. However, an FHA loan program called the Section 232 program funds healthcare facilities, such as hospitals, nursing homes, and assisted living facilities. If you’re an eligible borrower, you may use FHA-insured loans under this program to build, renovate, or refinance the facility.

It also requires following specific underwriting and loan origination standards to ensure the medical facility is financially capable of repaying the loan. The Section 232 program only applies to healthcare facilities, and FHA financing is generally unavailable for commercial properties in other industries.

FHA Rental Property Loan Program for Multifamily Properties

Offered by the FHA, the FHA rental property loan program is designed for multifamily properties. It provides low- and moderate-income families access to affordable housing options.

If you seek a financing option to acquire or refinance apartment complexes that have five or more units, this will be beneficial. Both rookie and seasoned investors find the flexible terms and smaller down payments a good choice.

Can You Buy a Commercial Property with an FHA Loan?

You can not use an FHA loan to purchase a commercial property. These loans provide a good opportunity to become a homeowner and aren’t your best choice for commercial real estate projects.

FHA commercial loans are a viable financing option for single and multifamily homes and condos. Since FHA loans are unavailable for most commercial real estate, zoning is necessary when deciding if a property is eligible for an FHA loan.

So, if you want to use it for commercial property like factories, office buildings, or shops, you’ll be disheartened. Additionally, to get approval for an FHA loan, the property must be occupied by an owner, which means the borrower needs to reside in the mortgaged property. It is one of those FHA commercial loan requirements. For commercial properties, opt for alternatives like an SBA loan or conventional commercial loan.

What Are the Requirements for an FHA Loan?

The approval conditions for FHA loans aren’t strict, as they’re designed for homeownership and are meant to be easily accessible. So, the relatively strict requirements for conventional real estate loans aren’t applicable to these loans.

While the conditions for FHA loans are fewer than conventional loans, certain things need approval, such as income evidence, a Social Security number, and residency in the state where the loan is provided.

• Down Payments

As with many other mortgage options, making a down payment is one of the early steps in obtaining a mortgage. FHA commercial loans don’t require heavy down payments and can be a minimum of 3.5%. A borrower with a credit score below 580 needs to put down at least 10%. Because of the low down payments, those who want to buy a home have a better chance of getting a mortgage with less down payment.

• Credit Score

You can still qualify for an FHA loan with bad or no credit scores, which makes FHA loans perfect for aspiring homeowners. However, 580 is the general credit score required for an FHA loan.

• Employment

The main concern for any lender is whether the borrower can repay the loan. So, you must submit proof of employment, which tells the FHA-approved lender that you can keep your end of the bargain. Employment proofs include a profit-and-loss statement, year-to-date balance sheet, and tax returns.

• Sufficient Income

Another requirement is your back-end ratio. It includes your mortgage payment and other monthly consumer bills, which must not exceed 43% of your gross income. Your front-end ratio is the sum of your insurance, mortgage insurance, property taxes, HOA fees, and mortgage payments.

• Debt-Paid History

Your work and payment history for utility and rent expenses over the past two years will be evaluated. Unless you accept a suitable repayment plan and fall behind on income tax payments or federal student loans, your application will be declined.

Also, if you have a record of foreclosure or bankruptcy, it might become a hurdle. The only way to bypass this is to be out of foreclosure or bankruptcy for 2-3 years. However, there may be exceptions. Talk to the experts at ALT Financial for more information.

FHA Mortgage Insurance Premiums

An FHA loan requires you to pay two types of mortgage insurance premiums (MIPs): one upfront and an annual MIP every month. You can pay the upfront MIP in two ways: during closing or by rolling it into the loan.

Failure to repay your loan will result in the money being used to pay off your mortgage. While called annual payments, borrowers pay annual MIP payments monthly, which range from 0.45% to 1,05% of the original loan amount. Depending on the loan terms and amount and the original LTV (loan-to-value) ratio, different payment rates may apply.

You must pay additional monthly premiums with the upfront MIP payment. You also need to make annual MIP payments for either the loan’s lifespan or 11 years, which will depend on the loan’s term and LTV.

The Takeaway

The FHA loan is perfect for those who have a low credit score or less money for a down payment. It is designed for low- and moderate-income homeowners to access funding for their dream home.