Purchasing and investing in commercial real estate is an extremely attractive possibility for many
people. However, the truth of the matter is, the process can be complicated and costly. Put simply,
you typically need quite a bit of liquid capital if you want to purchase a piece of commercial real
estate. However, with some clever strategizing and planning, you can always find a financing option
for you. And, in this article, we’re going to talk about one of the more creative ones.
What is an FHA Loan?
In general, FHA loans are designed for people looking to buy a home. They are beneficial because
they don’t require a high down payment or credit score, and they are backed by the federal
government. Many sources will tell you that FHA loans can not be utilized by investors or those
looking to purchase a piece of commercial property. But that can’t be further from the truth.
FHA loans are actually impressively flexible and, with the right knowledge, can be applied to many
different types of property. Let’s discuss the ways commercial real estate professionals can take
Can I Use an FHA Loan on a Commercial Property?
FHA loans must indeed be applied to a place in which you will reside for at least 12 months. While
most people translate this to define a single-family home, that is not a specific requirement of
securing a loan. In fact, some multi-family homes are also an option. What this means is that you
can begin generating income from other tenants within one multi-family home, while living in one of
the units yourself.
These so-called “mixed use properties” aren’t only restricted to multi-family buildings. They can
also include other commercial activities, including stores, professional services, and more. The
only requirement is that the non-residential portion cannot exceed more than 49% of the building.
Utilizing an FHA loan for a commercial property is not a common approach, it’s true, but it can be
done successfully, and with lots of different benefits.
The Occupancy Requirement
Because of the FHA loan’s flexible guidelines and affordable interest rates, there is one strict
requirement that can get in the way of a borrower using it on a commercial
property. This is the occupancy requirement. The occupancy requirement compels the borrower to
maintain the property as their primary residence for a minimum period of 12 months. There is no way
to get around this requirement without facing fraud and criminal charges, so borrowers shouldn’t
To fulfill FHA requirements, the borrower must take residence on the property within 60 days of
The Benefits of Securing an FHA Loan
FHA loans are incredibly beneficial and sought after by millions of people each year. This is why
the standards are so strict and non-negotiable. FHA loans are especially attractive for the
first-time commercial buyer. Some of the most notable advantages associated with FHA loans include:
● Low Credit Score Requirements
When it comes to securing a traditional commercial real estate loan, lenders look for borrowers
with a credit score of at least 680-700. For those just getting started with their investing
journey, this might be a difficult score to meet. This is where the FHA loan comes in handy. The
FHA loan sets the credit score requirement at 580, but those under this aren’t automatically
excluded. 580 is only required for a lower down payment. If you’re willing to put more down, you
can still qualify for an FHA loan with a lower credit score.
● Low Down Payment
Traditional commercial real estate loans require a hefty down payment. Some lenders require
borrowers to put down as much as 35%. And, because these buildings are so expensive, this number
can get high. The FHA loan swoops in to save the day here, too. Those with a credit score of at
least 580 can enjoy an insanely low down payment of 3.5%. Borrowers with credit scores below 580
can still enjoy a very fair down payment of 10%.
How to Qualify for an FHA Loan
As mentioned above, there are some standards set by the FHA, and not just anyone will be approved
for this type of loan. Contrary to popular belief though, FHA loans are not restricted to only
first-time buyers, and the qualification requirements tend to be much more relaxed than traditional
commercial loans. Some of the most important qualification requirements associated with being
approved for an FHA loan are:
1. A minimum credit score of 500
2. A debt-to-income ratio that is 50% or less
3. 3.5%-10% down payment
4. The property must be the borrower’s primary residence
5. The property must be inspected by an FHA inspector
Square Lake Capital Has Experience with Commercial FHA Financing
While it might sound like some sneaky loophole, securing an FHA loan for your commercial property
is not difficult at all. It’s something thousands of investors take
advantage of every single year. And, you can too! Square Lake Capital has lots of experience with
helping investors use the FHA loans to purchase commercial property and get their career underway.
Contact us today to learn more about how we can help you.