Self Sufficiency Test: FHA Loans on Three and Four Unit Buildings
Posted 02-17-2014 at 07:10 AM by MarkHafeli
FHA loans can be great for first time home buyers and owner-occupied two unit buildings but what about three and four unit buildings? FHA Loans are a good option on three and
Four Flat Chicago
A Large Four Unit Building in Chicago
four unit buildings but they must pass the self-sufficiency test.
The self sufficiency test states that the maximum mortgage is limited so that the ratio of the monthly mortgage payment, divided by the monthly net rental income, does not exceed 100 percent. In layman’s terms, the total monthly market rents as determined by your appraiser for all units (including the one you intend to occupy) must exceed your monthly mortgage principle, interest, taxes and both homeowners and private mortgage insurance. One part that is missing is the vacancy loss factor. HUD will use a vacancy rate on the market income of 15%. Which means the total market rents used by the appraiser are pared down to 85% of their value. That’s almost two months of missed rent per unit per year which in my experience is a pretty high estimate for vacancy. Either way, it’s part of the equation and must be taken into consideration. Here is what this test looks like in a formula:
(Market Rents per appraiser * 85%) > (Principle + Interest + Taxes + Insurance + PMI)
If yes, then this subject property would pass the self sufficiency test and you could proceed with attempting to obtain the loan for this specific property.
If your plans are to buy a three or four unit building with an FHA loan, make sure you prepare this test on your own before making the offer. If you know that the in-place rents are low compared to market, beware. The appraiser will more than likely use the in-place rents as market rents for the self-sufficiency test. Calculate the test with the in place rents and a 15% vacancy factor to see if you would pass. If not, then you risk wasting a lot of time under contract only to fail the test. If you aren’t able to come up with accurate figures for the test, or any other analysis on multi-unit properties, contact me, I can help.
Here is How HUD Describes the Three and Four Unit Provisions for FHA Loans:
“C. Three- and Four-Unit Properties. Regardless of occupancy status, the property must be self-sufficient (i.e., the maximum mortgage is limited so that the ratio of the monthly mortgage payment, divided by the monthly net rental income, does not exceed 100 percent). The mortgage calculations described below are in addition to the calculations detailed in paragraphs 1-6 and 1-7.
1. The monthly payment is the principal, interest, taxes, and insurance (PITI), including mortgage insurance, plus any homeowners’ association dues, computed at the note rate (no consideration for buydowns may be given).
2. Net rental income is the appraiser’s estimate of fair market rent from all units, including the unit chosen by the borrower for occupancy, less the appraiser’s estimate for vacancies or the vacancy factor used by the jurisdictional HOC, whichever is greater.
This calculation is used only to determine the maximum loan amount. Borrowers must still qualify for the mortgage based on income, credit, cash to close, and the projected rents received from the remaining units. The projected rent may only be considered as gross income for qualifying purposes; it may not be used to offset the monthly mortgage payment.
3. The borrower must have reserves equivalent to three months’ PITI
after closing on purchase transactions. Reserves cannot be derived
from a gift.”
Source: http://www.hud.gov/offices/adm/hudcl...1551c1HSGH.pdf
See my full blog here: www.chicagoreinvestment.com
Four Flat Chicago
A Large Four Unit Building in Chicago
four unit buildings but they must pass the self-sufficiency test.
The self sufficiency test states that the maximum mortgage is limited so that the ratio of the monthly mortgage payment, divided by the monthly net rental income, does not exceed 100 percent. In layman’s terms, the total monthly market rents as determined by your appraiser for all units (including the one you intend to occupy) must exceed your monthly mortgage principle, interest, taxes and both homeowners and private mortgage insurance. One part that is missing is the vacancy loss factor. HUD will use a vacancy rate on the market income of 15%. Which means the total market rents used by the appraiser are pared down to 85% of their value. That’s almost two months of missed rent per unit per year which in my experience is a pretty high estimate for vacancy. Either way, it’s part of the equation and must be taken into consideration. Here is what this test looks like in a formula:
(Market Rents per appraiser * 85%) > (Principle + Interest + Taxes + Insurance + PMI)
If yes, then this subject property would pass the self sufficiency test and you could proceed with attempting to obtain the loan for this specific property.
If your plans are to buy a three or four unit building with an FHA loan, make sure you prepare this test on your own before making the offer. If you know that the in-place rents are low compared to market, beware. The appraiser will more than likely use the in-place rents as market rents for the self-sufficiency test. Calculate the test with the in place rents and a 15% vacancy factor to see if you would pass. If not, then you risk wasting a lot of time under contract only to fail the test. If you aren’t able to come up with accurate figures for the test, or any other analysis on multi-unit properties, contact me, I can help.
Here is How HUD Describes the Three and Four Unit Provisions for FHA Loans:
“C. Three- and Four-Unit Properties. Regardless of occupancy status, the property must be self-sufficient (i.e., the maximum mortgage is limited so that the ratio of the monthly mortgage payment, divided by the monthly net rental income, does not exceed 100 percent). The mortgage calculations described below are in addition to the calculations detailed in paragraphs 1-6 and 1-7.
1. The monthly payment is the principal, interest, taxes, and insurance (PITI), including mortgage insurance, plus any homeowners’ association dues, computed at the note rate (no consideration for buydowns may be given).
2. Net rental income is the appraiser’s estimate of fair market rent from all units, including the unit chosen by the borrower for occupancy, less the appraiser’s estimate for vacancies or the vacancy factor used by the jurisdictional HOC, whichever is greater.
This calculation is used only to determine the maximum loan amount. Borrowers must still qualify for the mortgage based on income, credit, cash to close, and the projected rents received from the remaining units. The projected rent may only be considered as gross income for qualifying purposes; it may not be used to offset the monthly mortgage payment.
3. The borrower must have reserves equivalent to three months’ PITI
after closing on purchase transactions. Reserves cannot be derived
from a gift.”
Source: http://www.hud.gov/offices/adm/hudcl...1551c1HSGH.pdf
See my full blog here: www.chicagoreinvestment.com
Total Comments 0
