Are you looking to become a homeowner and build a long-term investment strategy at the same time? Purchasing a multi-unit property is a great way to accomplish exactly that.
For those wanting to buy a 3 to 4–unit property and are planning to use FHA financing, the property will need to pass the “FHA Self-Sufficiency Test” to qualify, if you plan on using expected rents as income.
Many people that invest in multi-family housing live in one of the units. So, this rule exists to make sure the property would still be self-sufficient if the borrower moves out. It requires lenders to compare the estimated rent generation and the expected mortgage payment.
The Basics of the FHA Self-Sufficiency Test
The FHA wants lenders to determine if the property being financed is what they consider “self-sufficient”. In other words, the monthly mortgage payment must be equal to or less than the total rent received.
A property isn’t self-sufficient if the mortgage exceeds the amount of rent the borrower will receive.
Additionally, the borrower must have three months’ worth of mortgage payments in savings for qualification purposes.
Again, this test only applies if the borrower is using expected rents as income on their mortgage application.
Passing the Self-Sufficiency Test
Let’s assume that a 3-unit complex has estimated total rents of $4,500/month based on the appraisal.
By regulation, the lender must now apply a 25% “vacancy factor” to that total rental figure, making the expected usable income $3,375 per month.
This $3,375 needs to be more than the estimated “all-in” mortgage payment, if the borrower is using expected rents on their application for qualification purposes.
This all-in payment includes all taxes, insurance, mortgage insurance, and any HOA/community fees.
In order to pass the self-sufficiency test, you’ll need to know the net rental income for the property. You can obtain this number from an appraiser. This professional can determine the potential of the rent you can receive for the property according to the current market.
This test is one of the largest hurdles in qualifying for an FHA loan on a 3-4 unit property. Passing it means the home will pay for itself, assuming you receive the designated rent.
In Conclusion
I run these estimates upfront for my borrowers while they’re out shopping for properties to avoid any issues. When rates and prices are high, this FHA self-sufficiency rule can be a hindrance on someone’s ability to use FHA to buy a 3 or 4 unit property.
Thankfully, duplexes are excluded from this rule and conventional financing has some lower down-payment options available.
Please contact me directly to discuss your current situation and how you might be able to take advantage of an FHA loan for a multi-unit property. It would be my pleasure to help you!
