Failing FHA self sufficiency test options

[Daniel Coleman]

Hello All,

I am actually helping a friend who is trying to purchase a quadplex, but a very unique quad plex.  THis partular quad is a single parcel, but actually is as follows:

2bd 1 bath 1100sq ft SFH

2bd 1 bath 900sq ft SFH

1bd 1 bath 660sq ft duplex

Studio 450sq ft duplex

This is the issue. The FHA appraiser appraised the value fine, but when he appraised the rents he is WAY off. Not to mention first off the rents that have been collected are as follows:

1050- 2bd 1100sq ft 

1000- 2bd 900sq ft

920- 1bd

800 -studio

FHA Market rents based on appraisal:

1120-2bd 1100sq ft

770-2b 900sq ft

575-1bd

400-studio

The PITI is around 2460 while this only hits 2148 after the 25% vacancy rule for FHA. I have provided comps closer (3.8 miles away) compared to the comps that the appraiser used (10 miles away) and he says he wants something closer. Also the appraiser used actual 4plex apartment buildings as his comps where this is nothing like that. My question is what options do we have to convince the appraiser, does anyone know of a conventional mortgage for a owner occupied 4plex that is less than 25%?

thanks in advance

[Albert Bui]

Originally posted by @Daniel Coleman:

Hello All,

I am actually helping a friend who is trying to purchase a quadplex, but a very unique quad plex.  THis partular quad is a single parcel, but actually is as follows:

2bd 1 bath 1100sq ft SFH

2bd 1 bath 900sq ft SFH

1bd 1 bath 660sq ft duplex

Studio 450sq ft duplex

This is the issue. The FHA appraiser appraised the value fine, but when he appraised the rents he is WAY off. Not to mention first off the rents that have been collected are as follows:

1050- 2bd 1100sq ft 

1000- 2bd 900sq ft

920- 1bd

800 -studio

FHA Market rents based on appraisal:

1120-2bd 1100sq ft

770-2b 900sq ft

575-1bd

400-studio

The PITI is around 2460 while this only hits 2148 after the 25% vacancy rule for FHA. I have provided comps closer (3.8 miles away) compared to the comps that the appraiser used (10 miles away) and he says he wants something closer. Also the appraiser used actual 4plex apartment buildings as his comps where this is nothing like that. My question is what options do we have to convince the appraiser, does anyone know of a conventional mortgage for a owner occupied 4plex that is less than 25%?

thanks in advance

To combat the SS or FHA self sufficiency rule its relatively simple because its basically a ratio you need to meet or exceed.

This ratio is:

75% of the Gross rents (lower of market rents by appraiser or current rents) for all units (even the owner occupied one) must be equal to or greater than the PITI on the property (prin/interest/taxes/insurance).

A quick rule of thumb I use to eye ball these types of deals and its not 100% accurate but its probably 95% is that the gross monthly rents of all units must equal .90% of the sales price with FHA (assuming 3.5% down & prevailing FHA rate + FHA MI/etc) in order to meet this SS rule.

When a property dips below .90% rent to value ratio or rent to sales price we seem to have an issue with this SS rule.

So what does this all mean behind all the lending hoopla? 

Yup you basically cant buy in core seattle/bellevue/etc using FHA if you're only putting down 3.5%, because the rent to value ratios are like .40-.55% of the sale price on the monthly rent/price ratio.

You can however put a huge amount of money down to make the ratio work or you dont use FHA, but if you put a huge amount of money down then why go FHA right? You mind as well go with conventional and avoid the monthly MI of .80-.85% and upfront MI premium of 1.75% which is nearly 2 points. Its like borderline hard money points upfront with a good low fixed rate for 30 years, my two cents.