FHA Self Sufficiency Test is a Stickler
Self sustainability/
sufficiency test is a problem for high cost areas. The rents are not high
enough to cover the payment so for example if the PITI is $12000 and rents are
$6000 minus 25% then we don't use any rent to qualify. You won't make it on FHA
in most high cost triplex and four plex because of this rule. High cost I
define as three or four units valued at more than eight hundred thousand
dollars.
To pass the self
sustainability test, the net rental income must be equal to or greater than
the projected monthly mortgage payment. The calculation is as follows:
1.
Realistically determine
the long term market rate rents that can or are already being charged for each
apartment/unit
2.
Multiply the total of
these rents by 75%
3.
Ensure that the total is
greater than the monthly mortgage payment by one dollar.
The test also requires
that the total rental income less the vacancy factor of 25% is equal to or
greater than the projected monthly mortgage payment. The vacancy factor is
determined by the jurisdictional Homeownership Center (HOC). Therefore a FHA
purchase loan in a high cost area where rents aren’t high enough to cover is
not a fit.
Conventional doesn't have
the rule. So the conventional 5% down may be your better choice.
What is a FHA 75 rule example?
For
example, if
the appraiser reports the rents of $6,000 per month, you would use 75 percent
of that, or $4,500. Thus, your rental income must be at least $4,501 in
order to qualify for an FHA multi-unit property loan.
Additionally, you
must have three months' worth of mortgage payments in savings, called reserves.
I need to know what the
total dollar amount of ALL your student loans are. We use 1% of the balance and
it doesn't matter if deferred. How many months remain on the auto loan? Is it a
lease or owned?
FHA 3-4 Unit Self Sufficient Calculation for FHA 3 or 4 unit property
Mortgages for three and four unit properties with non-occupying co-borrowers are limited to 75% loan to value (LTV).
Mortgages that exceed 75% LTV with a non-occupant co-borrower are limited to a one unit single family residence, condominium or planned unit development(PUD).
Regardless of occupancy status, the 3 or 4
unit property must be self-sufficient.
The maximum mortgage loan calculation
must meet all of the following:
• the Statutory limit for the property
location,
• the loan-to-value (LTV) limits
and • the 3 or 4 unit self-supporting mortgage
calculations described below:
Step 1: Calculate the monthly payment on
the new loan: Principal and Interest Real Estate Taxes Hazard Insurance FHA MIP
HOA Dues, if applicable @ Note Rate + + + + $ $ $ $ $ TOTAL Monthly Loan
Payment = $
Step 2: Determine the Monthly Net Rental
Income: Appraiser’s Estimate of Fair market Rent 1007 form (all units) $ Less the vacancy
factor (use factor from appraiser or 25% whichever is the greater) $ Projected
Net Rental Income = $
Step 3: The monthly mortgage payment
divided by the monthly net rental income cannot exceed 100%. If the result
indicates a percentage greater than 100% (negative cash flow) the mortgage loan
amount must be reduced. TOTAL Monthly Loan Payment $ Divided by ÷ Projected Net
Rental Income $ Result (if greater than 100% the loan is not self-sufficient
and the percentage of % Loan amount must be reduced). The appraiser performs a 1007 rental survey and borrower provides a lease. The lower number is used.
Notes: · Borrowers must ALSO 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.
The borrower must have reserves
equivalent to three months' PITI after closing on purchase transactions.
Reserves cannot be derived from a gift.
Alternatives if the
Property Does Not Pass the Test
- Seeking
another eligible property: If a property fails to meet the FHA Self
Sufficiency Test requirements, it may be necessary to explore other
properties that do meet the criteria. This ensures that potential buyers
can still secure FHA financing for a property that can generate sufficient
rental income. Generally this means going down in value, going away from a
view, reducing fire or flood insurance risks, searching out farther than
planned.
- Using
alternative loan programs like conventional but High Balance Conventional
for three or four units requires more down payment and smaller total loan
amount. Mortgage Insurance will be lower due to lower loan to value.
- Paying
points for a lower interest rate: Points, which are a form of pre-paid
interest, can be paid upfront to decrease the interest rate on the
mortgage. This can reduce the monthly mortgage payment and improve the
property’s cash flow. The points do not substantively reduce payment. A
half a percentage point may not reduce the payment by much.
.
Work with an experienced FHA
Lender give me a call
949 784- 9699
A good lender will get all the numbers into the forms and run the test on day one. You probably will want to lock on a Monday-thursday and know if you can get under the one dollar threshold. We will look at rental
comps BEFORE the appraiser does and get insurance
UP FRONT
Get your hazard insurance
quote at the first day of escrow
