exterior of modern health care facility that qualifies for FHA commercial loan

The FHA’s Commercial Loan Programs: An Introductory Guide

Victoria Araj3-minute read

November 21, 2022

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As you consider purchasing a commercial property, you may wonder about your lending options. Perhaps you don’t want to go the conventional loan route and you’re considering alternative loan options instead.

The Federal Housing Administration (FHA) backs loans under the jurisdiction of the Department of Housing and Urban Development (HUD). This means that the FHA protects your lender against loss if you stop making your mortgage payments.

Can you buy a commercial property with an FHA loan? In some cases, yes, depending on the property itself, how it’s used and if the owner lives there. In this article, we’ll dive deeper into when FHA commercial loans are permitted and discuss some of the FHA’s commercial loan requirements. It’s important to note that although Rocket Mortgage® does offer FHA loans, we do not offer loans for commercial property.

What Is An FHA Commercial Property Loan?

The Federal Housing Administration (FHA) insures mortgages for a wide variety of commercial projects aimed at encouraging the creation of housing for low-income, elderly and disabled people. Some loans are available to both for-profit and nonprofit enterprises, while others are only available to nonprofits.

To the FHA, a commercial property loan is different from its deceptively named single-family home loan program. Let’s take a look at the key differences between the two.

Residential Multifamily Loans

Many of us consider a duplex, triplex or 4plex to be a multifamily home, but the FHA considers them single-family homes if the borrower agrees to occupy the home for at least 1 year as a primary residence and doesn’t use the program for obvious investment purposes.

Mixed-use properties refer to properties intentionally used for a variety of purposes, including commercial, residential, retail, office or parking space. In other words, The FHA can and does approve loans on commercially zoned buildings deemed “primarily residential” in nature.

For example, a multi-story building with first-floor commercial space and apartments on the second floor may qualify for an FHA commercial loan.

Commercial Multifamily Loans

The FHA has a variety of what they also describe as multifamily programs, but to keep things clear, we’re referring to it as an FHA commercial loan. Remember, the distinction is whether the owner will occupy the home and how many units are involved.

When Does A Commercial Property Qualify For FHA Financing?

The FHA insures commercial loans for three types of both for-profit and nonprofit multifamily residential units:

The FHA also makes borrowing available to nonprofits in the fields of elderly housing (Section 202) and special needs housing (Section 811).

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What Is The FHA Rental Property Loan Program For Multifamily Properties?

Known as Section 207/223(f) loans, these mortgages facilitate the purchase and refinance of existing multifamily rental housing. Eligible properties must contain at least five units with complete kitchens and baths. The units must have been completed or substantially rehabilitated for at least 3 years prior to the date of the application for mortgage insurance, and must not be in need of substantial repairs. Critical repairs on the building must be completed prior to closing while non-critical repairs can wait until after closing.

These are commercial loans for rental properties with longer mortgage terms (generally up to 35 years) and lower interest rates than would be possible without FHA insurance on the mortgage.

Note that the lenders – private mortgage originators – will have to agree to the loan. The FHA does not disburse funds. Instead, it provides mortgage insurance that reduces the lender’s risks.

The Bottom Line: FHA Commercial Loans Come With Caveats

While the FHA insures mortgages for single-family, multifamily, and residential care facilities, the FHA does not grant loans for borrowers who want to buy wholly commercial properties.

Getting an FHA loan for a commercial property can be complicated, and it may not be the best option for a first-time real estate investor. If you’re just getting started in real estate investing, you may want to learn more about getting an FHA loan for an owner-occupied multifamily home.

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Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.