Darin and Christina Cunningham | Re/Max Elite
278 Franklin Road Suite 190 | Brentwood, TN 37027
Office: 615.661.4400 | Fax: 615.661.4115
Christina: 615.394.4168 | Darin: 615.456.4086



How a FHA 203B Loan Can Finance a Mixed-Use Residential Property

What Is the FHA 203(b) Loan

How a FHA 203B Loan Can Finance a Mixed-Use Residential PropertyThe FHA 203(b) loan is a government-backed loan program that provides financing for new or existing 1-4 unit, family homes in both rural and urban areas.

While conventional loans generally require a credit score of at least 620 and a ready down payment of between 5-20%, FHA loans can be secured with a credit score of 580 and a minim down payment of just 3.5%. Because the qualifying criteria for 203(b) loans are far less stringent than the credit requirements for commercial financing options, many first-time buyers turn to FHA-guaranteed loans when purchasing their homes.

It’s important to note that the FHA doesn’t directly finance loans itself, instead, the agency will insure your loan in partnership with a compliant bank or mortgage broker.  That means you’re ultimately responsible for negotiating the payment period and interest rates for your loan from an FHA- approved lender.

Using the FHA 203(b) Loan for Mixed-Use Residential Properties

Interestingly, because the language of the 203(b) loan allows for the purchase of multi-unit housing, many buyers wonder whether this loan can be used to finance their investment properties.  The answer is yes, provided certain criteria are met.

FHA 203(b) permits the purchase of 1-4 units housing for commercial purposes as long as these are mixed-use residential properties.  A mixed-use residential property basically combines residential and commercial functions in one structure. So, while you can feel free to lend out some areas of your property to tenants or businesses you must ensure that a substantial part of the structure is still used for your primary residence.

Specifically, the Housing and Urban Development Authority (HUD) handbook states that at least 51% of the property must be used for residential purposes. The final decision on property usage is made by an FHA Roster Appraiser, who undertakes a measurement of the area’s square footage in order to ascertain whether the property falls under the mixed-use residential property criteria.

In addition, the appraiser will also determine whether the non-residential portion of the property detracts from the residential aspect and overall marketability of the property. They will also seek to confirm that any business usage falls within applicable legal and zoning requirements.

Lucrative Loophole

Remember, just because the FHA has guidelines for mixed-use residential properties in place doesn’t mean the lender has to abide by them. Conventional loans on commercial properties tend to be at a higher interest rate, over a shorter term. While you might have 30 years to pay off a residential loan, a commercial loan may be due in just 7 to 10.

In many ways mixed-use residential property loans offer investors a potentially lucrative loophole.  But in order to take advantage of these attractive terms, you have to talk to your loan officer regarding the bank’s requirements for granting a loan on a mixed-use residential property.

Need More Expert Advice to Secure Your Mixed-Use Residential Property?

Realtor Darrin Cuttingham has years of experience identifying and negotiation time-sensitive property investment deals across the Nashville area, no matter the scale or purpose of your property purchase Darrin has the expertise to help you secure the best return on your investment . Contact Darrin now, at (615) 661-4400 for more information.

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