How strict is the FHA Self Sufficiency test?

Question

HELP! it been 3years now I’m trying to buy a property but it seems impossible for me. I been under contract for with few properties but things always goes wrong.

I am under contract with a 3 family multi unit in New York with FHA loan 3.5down deposit property cost is 1mil. I got declined for not meeting the 75% rental income paying for the Whole mortgage. I really want this property.

my question is are there any banks that you might know who are willing to over look that requirement and help me close on the property??? I make over 200k a year. My income is not a problem. Please help me find a bank that have a chill under writer who can approve my loan because I don’t want to pay over 200k down deposit that’s literally all of my cash. Thank you.

Nathan Grabau · Answer

I do not think there is a way around FHA requirements. These are legal requirements and a bank could be severely fined or lose the ability to write FHA loans if they do not follow it.

Do you know how close to the requirement you are? If you are close, you could put more cash down, lets say 5-7%, which would reduce your mortgage.

You could also to offer to pay for points, which would reduce your interest rate and reduce your mortgage cost. Last time I checked, every "point" you pay reduces your mortgage by about 3/8th of a percent. So paying 9600 in points would reduce your mortgage by about $250 a month. While not ideal, if you really want the would paying 2 points to take about $500 a month off your mortgage let you pass the test? This is an additional 19k as opposed to having to put 200k down.

Albert Bui · Answer

Also keep in mind on a FHA loan, a FHA case number # is ordered for each file and when a FHA appraiser performs an appraisal that property is linked to you and your appraisal so you cant just order a new appraisal because the lender see's all the prior numbers and will use worst case typically (even if you transfer to other lenders). Its important that on FHA 3-4 unit properties where the FHA Self sufficiency test applies, that you have the rental comps done correctly. Its always possible to try to challenge the rental comps and appraiser's rental figures but the probability of success on those is very low to be honest.

In high cost areas like the east and west coast cities its very tough to meet or exceed the FHA SS rule since the rental incomes relative to the cost/price of a property is often too low.

@Matthew Kwan@Carlos Valencia

Matthew Kwan · Answer

Anything 3-4 units will trigger the SS test. The projected gross rent of market rent at 75% has to exceed whatever your PITI is. I was fortunate enough to qualify it during covid times but if it's 1-2 unit with FHA, it will not trigger the SS test or lower your monthly PITI payment to make sure it passes the PITI test. In other words, have you thought about using another appraiser, at times your projected gross rent might change.

@Albert Bui @Carlos Valencia

Jay Hurst · Answer

@David Goldstick  VA does NOT have a self sufficiency test for a 3 or 4 unit property.  You do have to have 6 months in payments in reserve at the time of closing.

Albert Bui · Answer

If you make 80% of AMI or area median income limits, conventional financing has a 5% down 1-4 unit program (freddie home possible conventional) as well that can allow you to qualify up to 95% LTV leverage (5% equity/down) but the hard part is that AMI income limit because in high cost markets the AMI is way to low to buy anything in the 2-4 unit space and if they're lucky even a 1 unit townhome/SFR/condo/studio/micro apartment will be tough too.

So just because the program allows you to doesnt mean the income will allow you.

This conventional niche program has been awhile and has gone through many iterations where it was useful, became less useful, and now after the latest iteration its somewhat useful again for the midwest or lower cost markets.

Atleast Freddie HP doesnt have you meet the FHA SS - self sufficiency test right?

@Matthew Kwan@Carlos Valencia

Jaron Walling · Answer

If you make $200K per year why are you even using an FHA loan?..

Patrick Drury · Answer

@Bintou DialloAnything 3-4 units is subject to a sustainability test. It does not have to do with the lender themselves it has to do what the FHA requirements since they are not going to buy the loan unless it meets their requirements. You could shop around and see if there is a better owner-occupant product near you locally that could help you buy a 4-unit locally with minimal down like FHA and not have a sustainability test. Local credit unions/ local banks would be the places to check for these kinds of products.

Abel Curiel · Answer

Hello @Bintou Diallo,

About 1 year ago, self-sufficiency became more strict.

There is some room/leniency however. The tricky part is that the lender and appraiser would have to have good communication. The self-sufficiency rule is dependent upon the market rents that the appraiser is using.

Happy to connect you with my lender who has a ton of experience with this. Hopefully he can give some helpful insight without wasting any time.

David Goldstick · Answer

Does the FHA Self Sufficiency test also apply to threeplex/fourplexes for VA loans? Or is this lender-dependent?

Like the OP states, I should be able to find a suitable property that might not meet the sufficiency test but can make up for it with my income.

Yoon Ji · Answer

Is this possible for 3-4 units? A lender that I talked to recently said with primary residence would still require 15-20% down with a conventional loan.with conventional loan

How strict is the FHA Self Sufficiency test?

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