Buy a Duplex With Less Than 5 Percent Down

February 27, 2024 - 8 min read

Buying a duplex with minimal down payment

Buying a duplex can be an excellent investment opportunity, offering the potential for rental income and long-term appreciation. However, one common concern for aspiring investors is the need for a substantial down payment.

The good news is that it’s possible to purchase a duplex with a minimal down payment, thanks to various financing options available. In this article, we will explore strategies and financing programs that can help you buy a duplex with a smaller upfront investment, allowing you to take advantage of the benefits that duplex ownership brings.

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What exactly is a duplex?

A duplex is a property with two units at one address. It’s traditionally a way to get into the investment real estate game, because you get shelter for yourself, plus rental income and extra tax breaks. The rent can offset or even completely cover your mortgage and other costs.

Uncle Sam likes duplex properties, and rewards them with two sets of tax rules.

The owner-occupied unit can be treated as a primary residence. The rental unit can be treated as investment property. You can depreciate and write-off related repairs and improvements for the rental unit. For details, see a tax professional.

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Buy a duplex with less than 5 percent down

Lenders have mixed feelings about duplex properties. The same property may or may not qualify for a mortgage depending on strange and obscure requirements. The chart below shows two ways that lenders can look at your income and mortgage. One (Lender B) allows you to qualify for a lot more.

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First, nearly all lender reduce rental income by 25 percent to allow for vacancies and other income interruptions.

Lender ALender B
Borrower income$5,000$5,000
Income from rental unit$1,500$1,500
Adjusted rental income$1,125$1,125
Total borrower income$6,125$5,000
Maximum mortgage payment$1,960$2,725
Maximum loan amount (at 4% rate)$410,544$570,782

Underwriting can differ between programs

If you want to buy a duplex, know that some lending guidelines allow underwriters to “net” the adjusted rental income and payment. Lender B uses this method. If your payment was $2,000, and the rental income was $1,000, you’d only have to qualify based on a payment of $1,250.

$1,000 * .75 = $750 adjusted rental income. And the $2,000 payment minus the $750 rent equals $1,250. This makes qualifying easier.

However, other lenders, like Lender A, add the adjusted rental income to your other income, and then hit you with the entire mortgage payment when qualifying. You qualify to borrow less under these guidelines.

VA mortgages and duplex financing

VA rules say qualified borrowers can purchase properties with one to four units and zero percent down. One unit, however, must be your primary residence.

Buying a duplex with the VA program can be very advantageous. First of all, purchasing with nothing down is extremely attractive. Also, you’ll get residential mortgage rates and not investor financing rates, and eligible borrowers can benefit under the VA’s unique qualification system.

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Lenders generally qualify borrowers on the basis of credit, income, and down payment size. The VA program uses a system based on the borrower’s “residual income.” This is the money left over at the end of the month based on household size and geographic location. With a duplex, the income from the second unit can be used to increase residual income and qualify for a bigger loan.

FHA mortgages and duplex financing

The FHA, like the VA, does not make investment loans. It requires all financing in its basic 203(b) program to be secured by a primary residence. You have to occupy the home.

That said, you can use the FHA program with 3.5 percent down to buy property with one-to-four units, so a duplex is okay as long as you occupy one of the two units.

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While financing with 580 credit is available in theory, don’t hold your breath. Only 5.5 percent of all FHA-backed loans have credit scores between 580 and 619. As is usually the case with mortgages, higher credit scores and / or larger down payments are a major key to underwriting success.

Conforming loans

Conforming loans are those mortgages lenders can sell to Fannie Mae and Freddie Mac. They are commonly available with 5 percent down when financing a single-family prime residence. However, the rules change when financing a duplex.

For instance, the 95 percent financing available to single-unit residential buyers morphs into 20 percent down with Freddie Mac. The good news is that Freddie Mac recently introduced a new 5 percent down option for for multifamily homes.

Why is it that duplex buyers are expected to have bigger down payments with conforming loans?

Understanding duplex ownership risks

Ideally, you get great tenants who pay their rent and don’t drive you crazy. Unfortunately, the world is not ideal. You may not like your tenants. They may not like you. They may not pay their rent on time. Or at all.

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Lenders dislike risk. In their eyes, the least risky mortgage finances an owner-occupied, single-family residence with 20 percent down and a credit score nudging 800.

A duplex is only half owner-occupied, and it’s something other than a single-family residence, a hybrid that’s half-house, half investment property.

The buyer presumes that some or all of the mortgage will be offset with unit rent. The lender wonders what happens if there are vacancies or big repairs.

While the FHA has a three-month reserve requirement for properties with three and four units, it does not have a cash requirement for a duplex. But the VA requires six-months of cash reserves to buy a duplex.

While borrowers may be able to get by without the equivalent of several monthly mortgage payments in the bank, it’s not a good idea. To protect your interests (and your credit score), always have real cash in the bank, and a checking account attached to a line of credit.

What are today’s mortgage rates?

Current mortgage rates are at or near the same level for a duplex that they are for a single family home. The combination of rising rents and low rates can make becoming a landlord a profitable proposition today.

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What is a duplex, and what are the benefits of buying one?

A duplex is a residential property with two units in a single building. Buying a duplex can offer benefits such as rental income potential from one unit, flexibility in living arrangements, and potential tax advantages. It’s important to consider zoning regulations and financing eligibility for duplex properties.

What should I consider before buying a duplex as an investment property?

Before buying a duplex as an investment property, consider factors such as location, rental demand, potential rental income, expenses (including maintenance and vacancies), property management options, and your financial capability to handle the investment.

Should I live in one unit of the duplex while renting out the other?

Living in one unit and renting out the other in a duplex, also known as house hacking, can be a smart financial move. It can help offset mortgage costs and build equity. However, it’s important to consider your comfort level with being a landlord and the impact on your lifestyle.

What financing options are available for buying a duplex?

inancing options for purchasing a duplex include traditional mortgages, FHA loans (which allow for lower down payments), and portfolio loans from local banks or credit unions. It’s important to research and compare loan programs to find the best fit for your situation.

What are the potential challenges of owning a duplex?

Challenges of owning a duplex can include dealing with tenant turnovers, managing multiple rental units, potential conflicts between tenants, and ensuring compliance with rental laws and regulations. Careful tenant selection, proactive property management, and understanding local regulations can help mitigate these challenges.

What due diligence should I perform before buying a duplex?

Before purchasing a duplex, thorough due diligence is essential. This includes conducting property inspections, reviewing financials, assessing rental histories, and verifying permits and zoning compliance. Engage professionals such as home inspectors, appraisers, and real estate attorneys to assist with the process.

What are the tax implications of owning a duplex property?

Tax implications of owning a duplex can include deductible expenses like mortgage interest, property taxes, insurance, and maintenance costs. Consult a tax professional to understand the specific deductions, depreciation benefits, and reporting requirements that apply to your situation.

Peter Miller
Authored By: Peter Miller
The Mortgage Reports contributor
Peter G. Miller, author of The Common Sense Mortgage, is a real estate writer syndicated in more than ​50​ newspapers nationwide. Peter has been featured on Oprah, the Today Show, Money Magazine, CNN and more.
Aleksandra Kadzielawski
Updated By: Aleksandra Kadzielawski
The Mortgage Reports Editor
Aleksandra is the Senior Editor at The Mortgage Reports, where she brings 10 years of experience in mortgage and real estate to help consumers discover the right path to homeownership. Aleksandra received a bachelor’s degree from DePaul University. She is also a licensed real estate agent and a member of the National Association of Realtors (NAR).