FHA vs. Conventional: Strategizing Your San Diego Duplex Purchase
Buying a duplex in a competitive market like San Diego County is a savvy move, whether for investment or 'house hacking'—living in one unit and renting out the other. But your financing choice can make or break the deal. Both FHA and Conventional loans allow you to purchase a two-to-four-unit property as your primary residence, but they have critical differences in down payments, property requirements, and how sellers perceive them. Understanding these distinctions is key to structuring a winning offer on a property in San Diego or Chula Vista.
Which loan has a lower down payment for a duplex in San Diego?
This is where the FHA loan initially shines, especially for buyers with limited cash on hand.
FHA Loan: An FHA loan requires only a 3.5% down payment for owner-occupied properties with one to four units. This is a significant advantage in high-cost areas.
- Example: On a $950,000 duplex in Chula Vista, an FHA loan would require a down payment of just $33,250.
Conventional Loan: The requirements are substantially higher for multi-family properties. For a duplex (a two-unit property), most conventional lenders require a minimum 15% down payment.
- Example: The same $950,000 duplex would require a $142,500 down payment with a conventional loan.
For buyers focused on minimizing initial cash outlay, the FHA loan is the clear winner. The lower barrier to entry makes it an accessible path to owning an income-producing property.
How much future rental income can I use to qualify?
Using the rental income from the other unit(s) is a core part of the house-hacking strategy. It helps you qualify for a larger loan than your personal income alone would allow. Both loan programs permit this, but with slightly different calculations.
FHA Rental Income Rules
FHA guidelines allow you to use a portion of the future rental income to offset your mortgage payment and boost your qualifying income. The lender will order an appraisal that includes a 'Comparable Rent Schedule' (Form 1025/1004). This form establishes the fair market rent for the unit(s) you won't be occupying.
- Calculation: Lenders typically use 75% of the gross estimated rent. The 25% reduction is called a 'vacancy factor' and accounts for potential vacancies and maintenance costs.
- Example: If the appraiser determines the second unit of your prospective San Diego duplex can rent for $3,000 per month, you can add $2,250 ($3,000 x 0.75) to your monthly qualifying income.
Conventional Rental Income Rules
Conventional loans, guided by Fannie Mae and Freddie Mac, have similar rules. They also rely on an appraiser's rent schedule and apply a 25% vacancy factor.
- Calculation: The method is identical: 75% of the gross monthly rent can be used as qualifying income.
- Lender Overlays: While the base guidelines are similar, conventional lenders sometimes have 'overlays'—their own stricter rules. Some may require you to have prior landlord experience or have more cash reserves to use rental income for qualifying. It is crucial to check with your specific lender. The data, information, or policy mentioned here may vary over time.
Both loan types provide a powerful advantage by counting future rent, but FHA is often more straightforward without the potential for lender-specific landlord experience requirements.
Do Chula Vista sellers view FHA offers as less competitive?
In a fast-paced, multiple-offer market like Chula Vista or greater San Diego, the answer is often yes. This perception isn't about the buyer's financial strength but rather the loan's property requirements.
Sellers and their agents know that FHA financing is tied to a stricter appraisal process. An FHA appraiser must ensure the property meets HUD's 'Minimum Property Standards'. This means they are looking for issues related to:
- Safety: No exposed wiring, functional smoke detectors, secure handrails.
- Security: All doors and windows must be secure and lockable.
- Soundness: No major structural defects, a roof with at least 2-3 years of life remaining, and no peeling or chipping paint on homes built before 1978 (due to lead-based paint hazards).
If the appraiser flags an issue, it must be repaired before the loan can close. This can lead to delays, renegotiations, or even a terminated contract. A seller with multiple offers on the table will likely favor a conventional offer, which is perceived as having a smoother and more certain path to closing.
Are property condition standards stricter for FHA multi-family loans?
Yes, absolutely. This is a direct extension of the previous point and a critical factor for duplex buyers.
FHA Appraisal: The FHA appraisal protects both the borrower and the lender (HUD) by ensuring the home is habitable and safe from day one. The appraiser acts as a basic home inspector. Any noted deficiencies, from a leaky faucet to a damaged roof, will likely become a 'condition' for the loan to be approved. This is especially true for older multi-family properties that may have deferred maintenance.
Conventional Appraisal: A conventional appraisal is primarily focused on one thing: determining the property's market value to ensure it's sufficient collateral for the loan. While the appraiser will note obvious major defects that impact value (like a failing foundation), they are not required to enforce a checklist of minor repairs. A home can be sold 'as-is' much more easily with a conventional loan.
If you're considering a duplex that needs some work, a conventional loan provides much more flexibility.
Is mortgage insurance more expensive on a Conventional or FHA loan?
Mortgage insurance protects the lender if you default on the loan. Both loan types require it when you have a low down payment, but it functions very differently.
FHA Mortgage Insurance Premium (MIP): FHA MIP has two components:
- Upfront Premium (UFMIP): A one-time fee of 1.75% of the loan amount, which is typically rolled into your total loan balance.
- Annual Premium: Paid monthly as part of your mortgage payment. With a 3.5% down payment, this premium is paid for the entire life of the loan. You cannot cancel it unless you refinance into a different loan type.
Conventional Private Mortgage Insurance (PMI):
- Cost: The monthly cost of PMI is based on your credit score, loan amount, and down payment percentage. Borrowers with excellent credit may find PMI to be cheaper than FHA MIP.
- Cancellable: This is the key benefit. PMI can be requested for removal once you reach 20% equity in your home and automatically terminates when you reach 22% equity. This significantly reduces your monthly payment in the long run.
While FHA is cheaper to get into, Conventional is often cheaper over the life of the loan because of the ability to eliminate PMI.
What are the reserve requirements for buying a multi-family home?
Reserves are the funds you must have left in your bank account after closing. They act as a safety net for the lender.
FHA Reserves: For a 1-2 unit property, FHA often has no reserve requirement. For 3-4 unit properties, you are typically required to have 3 months' worth of the full mortgage payment (PITI) in reserves. The data, information, or policy mentioned here may vary over time.
Conventional Reserves: Lenders almost always require reserves for multi-family properties. The standard is often 6 months of PITI for a 2-4 unit home. This can be a substantial sum of money you need to have liquid, in addition to your down payment and closing costs. The data, information, or policy mentioned here may vary over time.
For a duplex, the lack of a reserve requirement gives FHA another edge in reducing the total cash needed to close.
Can I use gift funds for the down payment on both loan types?
Yes, both programs are flexible about using financial gifts from family or other approved sources.
FHA: Allows 100% of your down payment and closing costs to come from gift funds. The relationship of the donor must be documented, but this is an incredibly helpful feature for first-time homebuyers.
Conventional: Also allows gift funds. However, for a multi-family property with a down payment of less than 20%, the borrower may be required to contribute at least 5% of the purchase price from their own funds. The rules can be lender-specific, so it's important to verify upfront. The data, information, or policy mentioned here may vary over time.
Choosing the right loan for a multi-family property in San Diego involves balancing upfront costs with long-term strategy and offer strength. To see which option aligns with your financial goals and makes your offer competitive, Apply now for a detailed loan comparison with an experienced mortgage professional.
Author Bio
David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.
References
Consumer Financial Protection Bureau - What is private mortgage insurance?
