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One of the little known uses of FHA 203k financing is to purchase (or refinance) a small building that has both commercial space and residential space. This is allowed by FHA only for owners who will live in the residential space. The commercial space can be leased to a new business, an existing business or house the owners business.

The FHA guideline is that of the total square footage in the building, at least 51% must involve the residential space and no more than 49% the commercial space. The key on this rule is how to count square footage. A 2 story structure with a commercial storefront on the first floor and an apartment on the second floor is a common type of property. It might appear to be a 50/50 split. But there are staircases to climb up to the apartment that are not counted as part of the commercial space. The reason why is the commercial space users have no reason to enter the second floor residential apartment. So most times the commercial space should be less than the residential space square footage.

The 203K loan must have some minimum rehab component to it for this to work. Here is an example. A buyer wishes to purchase a 2 story property with an office space on the first floor and one apartment on the second floor. The purchase price will be $250,000. Additionally the buyer wants $10,000 to update a bath in the residential space. The total transaction is $260,000. The down payment can be as little as 3.50% down with this type of loan. The down payment is calculated on the total transaction cost of $260,000. The buyer may want to run a business out of the commercial space and live upstairs. The 203K loan is perfect for this situation.

The 203k is a great alternative to what otherwise might have to be done as a commercial loan with less favorable terms for a mixed use property. Additionally there may be tax advantages for a business owner to lease commercial space, in effect from themselves. Please check with your CPA for expert guidance.

The maximum size of the building is limited to 4 units total, including the commercial space. In Chicago and many other cities there are buildings with a small storefront on the first floor and 1 or 2 or 3 apartments above. These properties are ideal for this type of financing provided the residential part of the building is to be owner occupied. The 203k cannot be used by investors planning to lease out the entire building.

One last item to consider is whether there are other similar buildings close by that can be found by an Appraiser to be used as comparable sales. There must be closed sales within about the last year close by to be used to do a valuation report on the mixed use property. The valuation or appraisal is done to the final “as finished” value of the building based on a contractors description of the rehab work to be done as part of the 203K financing. In the above example we would look for a valuation of $260,000 with the $10,000 of remodeling planned based on a $250,000 purchase price. Finding “like” comparable closed sales is necessary for the mixed use 203K loan to be approved.

I hope this post has been helpful and encouraging to those that may have thought a Renovation project was too complex or beyond their ability to manage. My intent is always to inform, educate, and generate discussion. Please call me or email me directly or visit my website for more information on renovation loans. I welcome your comments and questions!

Join the discussion 12 Comments

  • Autumn says:

    Great info! Wondering. Does use at time of loan dictate or use following improvements? Looking at five rented units up, laundry storefront, owner down walk up. Thinking convert enough up for owner occupied and get some cheap and easy financing.

    Thanks again. So grateful to hit your article.

    • PerryF says:

      On the 203k mixed use scenario the final and total number of units in one building is capped at four. Residential total square footage must be 51% and 49% commercial. I hope that helps.

  • Will Thompson says:

    Do you help people get these type of loans, are you a lender..?

  • Nury Garcia says:

    On a property that has a total of four units, one being a commercial unit with 1,790 sq. ft, second is a residential with 500 sq. ft., third residential with 800 sq. ft and fourth residential with 800 sq ft.. This is located in Palm Beach county, Florida…… The maximum for a 3 unit loan amount is 553k , for 4 units is 663k. Will i be able to use the commercial building to get the 4 unit maximum loan at 663k?

    • PerryF says:


      On this one I see that residential space is 2100 square feet and commercial is 1790 square feet. So it meets the 51% residential rule for a mixed use property. Yes with a 203k this is viewed as a 4 unit and will allow the 4 unit loan limit. Just understand no rehab funds can be spent improving the commercial space and it must be , currently, in a fully usable state by itself, needing no rehab to be rented.

  • Bob Carbon says:

    Hi Perry –
    Good info. We are looking at a building that is currently commercial (garage with office) with apartments (1 or 2 units) above. We are considering the property as a live/work space that we will occupy for both. However, we might not keep the current layout as we would possibly have some of the residential spaces on the 1st floor — what is now a very large commercial space. Any idea if that could work under the 203k loan requirements?

    • PerryF says:


      Generally as long as the 49% max commercial space rule is observed and no cash form a 203k can be used to repair the commercial space you can do it.

  • Colleen K says:

    I bought a small church building for $15K – it has a basement apartment, which needs work. The building itself needs repair. Our plan is to use the church as a community event center. The property probably needs about $50K in repairs and updates. Can I use a 203K for this purpose, if I already bought the building? Are there other programs which may be better suited for our plan? I don’t know if it matters – I’m a 100% disabled veteran.

    • PerryF says:


      On your question about the church building with an apartment in basement. If it is zoned as mixed use and the commercial space is not more than 49% of the total square footage, which it sounds like it is not, then yes a 203k refinance loan will work. But one caution is that none of the 203k rehab funds can be spent one the commercial (church) space, only in the apartment space or common areas per 203k rules on mixed use property. Separately as a veteran there will be a VA loan option out soon Im told that will have an option to borrow funds to do rehab. I hope to have more details in the weeks ahead. That can also be done as a refinance loan. But not sure that any rehab funds can be used in the commercial space on that loan either.

  • RM says:

    Can you use this for straight up construction, i.e., build a three unit residential with one unit commercial property? And if so, are their lenders who actually will lend to do it?

  • RM says:

    And if you are dealing with a three residential unit and one commercial unit building, is the FHA maximum loan amount for high cost areas the three family loan limit or four?