New: 5% Down Payment Option for Multifamily Homes in California

Are you planning to buy a multifamily property in California during 2024? Do you have limited funds for the down payment on such a purchase?

If so, we have some good news for you.

A recent policy change from the government-sponsored mortgage buyer Fannie Mae allows borrowers to use a conventional loan to buy a multifamily home in California, with a down payment as low as 5%.

This is a significant change from the previous down requirement of 15% to 25%. As a result, it could bring a whole new group of buyers and investors into the California multifamily real estate market in 2024.

5% Down Payment for California Multifamily Properties

A new policy from Fannie Mae has significantly reduced the down payment requirement for owner-occupied multifamily homes in California. Specifically, it increases the allowable loan-to-value (LTV) ratio to 95%, for properties with two to four units.

This in turn reduces the minimum required down payment to just 5%.

Previously, borrowers needed to put down 15% to 25% of the purchase price for duplexes, triplexes, and quadplexes in California. Under the new rule, that requirement drops to just 5% and lowers the barrier to financing.

This change took effect back in November and will remain in effect through 2024 as well. It applies to conventional (non-government-backed) mortgage loans that are purchased by Fannie Mae.

More specifically, the reduced down payment requirement applies to conventional purchase loans for owner-occupied 2-, 3-, and 4-unit properties. It does not apply to high LTV refinance loans, HomeReady, HomeStyle Renovation, or manufactured housing.

According to an update the company sent out back in October:

To expand access to credit and provide support for affordable rental housing, the maximum allowable LTV, CLTV, and HCLTV ratios for two- to four-unit, principal residence, purchase and limited cash-out transactions will be updated to 95%”

Additionally, the 5% down payment rule does not apply to “high balance” mortgage loans. This means that the amount you need to borrow must not exceed the conforming loan limit for the county where the home is located. You can find these limits on the FHFA.gov website.

Expanding the Rental Market in California

Fannie Mae also expects this change to have a positive impact on rental markets by increasing the overall supply of available units. And as you probably already know, that’s something California really needs right now—more housing units.

This is a significant policy change that could make multifamily homeownership more accessible to first-time buyers and investors in California. It will especially benefit those buyers who have limited savings but want to enter the multifamily market.

Owning a multifamily property allows the owner to live in one unit and rent out the others, potentially generating income to offset mortgage payments and build equity. It’s an attractive investment strategy in California, due to the strong need for such housing.

How Individual Borrowers Could Benefit

The reduced 5% down payment requirement for California multifamily properties brings some obvious advantages. Namely, it will allow a broader group of borrowers to qualify for financing and purchase multifamily homes across the state.

This new policy could bring other potential benefits as well.

• Reduced financing barriers: The lower down payment requirement opens the door to multifamily homeownership for more people, including first-time buyers and those with less savings in the bank.
• Easier entry into the rental market: This type of loan product allows buyers to live in one unit and rent out others, generating income to help offset mortgage payments.
• Faster equity building: Owning a multifamily property gives owners an opportunity for potential equity growth on all of the units, not just the one being occupied by the owner.
• Improved housing availability: A higher number of homeowners renting out units could also help to ease rental shortages in some California markets, at a time when it’s desperately needed.

It bears repeating: The lower down payment requirement introduced in November greatly reduces the amount of money borrowers have to come up with, when buying a multifamily property in California.

Here’s an example to illustrate this point:

• Before the change: A person buying a $500,000 triplex property with three units would have had to make a down payment as high as $125,000.
• After the change: That same borrower could purchase that same triplex with a down payment as low as $25,000 (5% of the $500K loan amount), a much smaller investment.

Borrowers who were previously “shut out” of the multifamily real estate market in California due to higher investment requirements could now qualify for financing.

Borrowers Still Must Be Well Qualified

As always, borrowers who wish to purchase a multifamily home must be well qualified to take on such a loan obligation. This has always been the case, and the revised down payment requirements implemented by Fannie Mae won’t change it.

Generally speaking, home buyers seeking financing for a multifamily property in California must have the following credentials:

• A good credit score, typically north of 600.
• A manageable level of debt including the new mortgage loan.
• Sufficient income to cover the monthly payments and other recurring debts.

These requirements can vary from one lender to the next. To improve your chance of getting approved, you can work with a mortgage broker like us who has access to multiple lenders.