Watch out Sellers with triplex and fourplex for sale in high priced markets.FHA offer may appear great but has some pitfalls to be aware of.
FHA's self-sufficiency test ensures that a property generates enough rent to cover its expenses, including the housing payment. The test requires that 75% of the total market rent for all units be more than the total monthly mortgage payment. The total payment includes principal, interest, taxes, mortgage insurance (PMI), and any other insurance (like homeowners insurance).
The income needs to be over and above the buyer's maximum monthly mortgage payment, or principal, interest, taxes, and insurance (PITI). This income needs to account for the vacancy rate and estimated maintenance fees.
To pass the test, the building and the rents have to pass a self-sufficiency test. To get approved for an FHA loan based on rental income, the lender must calculate the net rental income plus the depreciation from schedule E of the tax returns, and then divide that by 12. If the rental property is new and you do not have a tax return to provide yet, the lender will use 75% of the rental income on your loan application. You may be required to provide copies of the leases along with proof of bank deposits. Short term rental doesn't apply as you are newby home buyer with no track record of managing STR
FHA self sufficiency test uses the MARKET rents on the units that the owner will not occupy. 75% of the rents needs to cover the mortgage payment (PITI). Much more strict than DSCR as DSCR uses the real rents and some no haircut some only 10% discount.
Buyer qualifies with their income plus 75% of the other rents. In high priced markets this makes the loan fail. This means no mortgage approval. Rents are not as high as the sale price in proportionate measure. Very common problem when price exceeds $500000. Triplex and fourplex rents also tend to be lower than SFR rents further exacerbating the problem.
Seller beware on units when offer is FHA because the inexperienced loan officer gets stuck on this problem after the appraisal on day twelve or later when they should have run the numbers before starting the loan. The appraiser determines the market rents with a survey (form 1007). This number now STICKS on the property just as an FHA appraisal is glued to the address for six months. FHA case number allows all subsequent lenders to see the valuation and the 1007.
1007 form licensed Appraiser uses determines the market rents. The appraiser surveys other advertisements and calls property managers to determine the monthly rental income for the square footage, location, and property type. The listing agent can provide this information BEFORE the appraiser starts, just like with assisting providing comparable sales it is vital that the listing agent provides the market facts to appraiser at the start. Doing a reconsideration wastes time and is very difficult to overturn a person's opinion. Your mortgage lender should be asking listing agent to provide all the comps and rental history possible as it only helps the deal close.
