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How to Buy a Duplex

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Buying a duplex isn’t that much more complicated than buying a single-family home, but you’ll need to make a major decision before you can choose a mortgage loan: Do you want to live in the duplex or rent out both units? This guide to the pros and cons of owner-occupied versus investment property loans will give you a jump-start on exploring your loan options for financing a duplex.

What is a duplex?

A duplex is a single building divided into two separate “units,” or living areas. Each unit can be rented separately, but both are usually owned by a single homeowner. Duplexes are sometimes referred to as multifamily housing, but technically they — and any home with up to four units — are considered multi-unit, single-family housing by the U.S. Census Bureau and for the purposes of a mortgage loan. Buildings with five or more units are considered to be multifamily housing or commercial property.

However, if you’re looking into buying a duplex, be aware that you may see the term “multifamily” loosely used to mean any house with multiple units.

Buying a duplex is a great way to enter the real estate market as an investor and reap the huge benefits it can offer. Properties that generate income for their owners are a smart move, and the housing market has seen rising rents since early 2020. Fueled partly by a housing shortage, the national rental market is projected to continue seeing high demand over the next four years.

How to purchase a duplex

A major factor in what mortgage loans you’ll qualify for is whether you want to live in the duplex and rent out the other half or rent both units.

Owner-occupied financing If you decide to live in the duplex, you can pursue multi-unit financing, meaning government-backed loans that cater to homeowners who want to purchase a home with multiple units and live in it as their primary residence.

Multi-unit government-backed loans will offer the most favorable terms for buying a duplex, but there is no way around it: The owner is required to live in the property for a substantial amount of time. For this reason we will also refer to government-backed loan programs that allow the purchase of multi-unit properties, like duplexes, as “owner-occupied” financing.

Investment property financing The alternative is investment property financing, which doesn’t require you to live in the property. You can rent out both units or just one — it’s up to you.

The good news is that with both types of financing, you can usually use future rental income to qualify for your loan.

How to buy a duplex with owner-occupied financing

Owner-occupied financing offers a value proposition so unique that it has its own slang term in pop-culture: house hacking. Many savvy homeowners have found that living in a duplex while also renting a unit can drastically reduce their housing expenses. If the rental income can cover your mortgage payments, you’ll essentially be living in your duplex for free and building equity to boot.

Living in the building allows you to qualify for loans backed by the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA). These loans have favorable terms and open up real estate investing to a larger swath of people by catering to those who may need looser qualification requirements and lower down payments to enter the market.

Owner-occupied financing offers the best loan terms on a duplex but usually requires that you live in the property for at least a year. If you’re able and willing to move, sharing a wall with your tenants can be an attractive option, especially for first-time landlords who may be uneasy with a hands-off approach to their new property.

How to buy a duplex with investment property financing

Investment property financing doesn’t require you to live in the property. If you go this route, you’ll be free to rent out both units from day one, and you can even try to purchase a duplex with tenants already in it. However, because you won’t qualify for government-backed loan programs, you’ll have to come up with a higher down payment — usually 20% at minimum for conventional loans — and pay higher interest rates.

You should also expect to face some scrutiny from the lender, who may ask you to show proof that you have experience renting properties and have enough cash on hand to cover two to six months of mortgage payments in case you hit any roadblocks with finding or keeping renters.

Loan options for a financing a duplex

A rule of thumb to keep in mind as you assess your options is that investment loans will be more expensive than owner-occupied loans. For example, the interest on an investment loan will likely run 0.5 to 0.875 percentage points higher than for an owner-occupied loan. This may not sound like much, but even at a median home price — $416,000 in June 2022 — it could add over $38,000 to your interest payments throughout a 30-year loan.

An investment loan will also require you to have more cash reserves on hand because lenders want assurance that you can cover mortgage payments even if you aren’t able to find renters right away. Typically, you need cash reserves equal to six months’ worth of principal, interest, tax and insurance (PITI) payments on the new mortgage. For example, if your monthly mortgage payment (including PITI) is $2,000, you may need $12,000 or more in your bank account to qualify for a loan.

The table below outlines the minimum mortgage requirements for standard loan programs to buy a duplex home.

Loan programMinimum down paymentMinimum credit scoreOccupancy requirementCash reserves
Fannie Mae25%660-680Borrower not required to live on the property6 months of mortgage payments
Freddie Mac (HomePossible®)5%700Borrower not required to live on the property2-8 months of mortgage payments
FHAVaries by credit score:
  • Group A: 10%
  • Group B: 3.5%
Varies by down payment:
  • Group A: 500-579
  • Group B: 580
Borrower’s primary residence1 month of mortgage payments
VA0%No minimumBorrower’s primary residence6 months of mortgage payments

Using future rental income to qualify

Being allowed to use future rental income to qualify for a loan is a real boon, especially for those working with a limited cash flow. It means lenders will add a portion of the income you stand to earn from future renters to your current income when they calculate how much of a loan you can afford.

Here’s a breakdown of how the major loan types will count your future rental income:

  • Conventional loans will calculate your future rental income and add at least 75% of that amount to your income when evaluating your loan qualification information. If the duplex hasn’t been rented recently, don’t worry — you can use estimated rental figures.
  • FHA loans will count 75% of future rental income as estimated through appraisal or actual rental history, whichever is lower.
  • VA loans will count 75% of future rental income, but you must be able to prove that you have experience renting properties or are otherwise likely to succeed as a landlord.

Future rental income can make or break your ability to qualify for a loan if your debt-to-income ratio (DTI) is near the cutoff of 45% for a conventional loan. Say, for example, that you want to buy a duplex with a monthly payment of $2,000. You plan to live in one unit and rent the other for $1,300. Your lender would likely allow you to count $975 — 75% of $1,300 — towards your income when calculating your DTI. Now, instead of $2,000 on the “debt” side of the ratio, you’ll only have $1,025.

Pros and cons of buying a duplex to live in

ProsCons
  You’ll reduce your living expenses.  You’re required to live in the duplex for a significant period of time, usually 12 months. 
  You can make a lower down payment.  You’ll have to live in very close proximity to your renters. 
  You’re more likely to qualify because government-backed loans generally have less stringent requirements than conventional loans.  You’ll pay more in insurance because landlord insurance costs more than homeowner’s insurance.
  You can borrow more if you need to. Loan limits are higher for multi-unit properties than for single-family homes.  You won’t make as much rental income as you could if you were renting out both units.
  You’ll build equity.  You may find it more of a struggle to sell a duplex, compared to a single-family home.
  You’ll gain experience as a landlord and real estate investor.  Upkeep and repairs on the rented unit may be more expensive than on the unit you reside in.
  You’ll reap the tax benefits of homeownership, like the mortgage interest tax deduction

Pros and cons of buying a duplex as an investment

ProsCons
  You’ll get the most rental income possible because you are renting out all available units.  You won’t reduce your living expenses, and may have to carry two mortgages if you decide you want to live in a home you own.
  You don’t have to live near your tenants.   You’ll need a bigger down payment and more cash reserves than you would for a government-backed loan.
  Higher loan limits will allow you to buy in more expensive or desirable areas, which will likely have higher rents.  You’ll face some of the most stringent qualification requirements.
  You’ll have to pay higher interest rates on your loan.
  You stand to lose more if the rental market takes a downturn, since the duplex is financed with the rental income from two units in mind.

Frequently asked questions

Technically, the answer to this depends on the conventions and laws that define a duplex in your area. In most cases, when a building like a duplex is built on a lot that is split down the middle of the two units, creating two separate lots owned by two different people, it becomes a townhouse or “twin home.”

It is possible to buy a duplex with no money down, but unless you qualify for a VA loan, you may have to get creative. You could look into entering a lease-to-own deal or pooling resources with others through group investing.

The average cost to build a duplex is between $95 and $220 per square foot, according to data from Fixr. The cost to buy a duplex will vary widely depending on the location, size and housing market when you buy.

You can qualify for an FHA loan on a duplex with a credit score of 500, which is considered “very poor” by most credit bureaus. However, you’ll need to also meet the DTI and housing expense ratio requirements to qualify for a loan, and this may be tough to do if you’re dealing with bad credit and struggling financially.

The maximum conforming loan amount for a two-unit property like a duplex in most of the United States is $828,700. In Alaska, Guam and the Virgin Islands, the limit is higher to reflect higher housing costs and is capped at $1,243,050.

 

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