Real Estate Agent · Bay Area · Member since 2022 · 25 posts · 19 votes
I'm a real estate agent in the bay area and have found that three and four-unit buildings with FHA loans don't ever pencil out because of the "self-sufficiency test". I'm wondering if (and where) agents or investors have successfully utilized an FHA loan on a three and or four-unit building with only 3 1/2% down.
Looking to utilize an FHA loan in one of these areas. My partner works remotely, so I think we can convince an underwriter to give us an FHA loan as we meet the criteria! Looking for some value add! Thanks BP!
I'm a real estate agent in the bay area and have found that three and four-unit buildings with FHA loans don't ever pencil out because of the "self-sufficiency test".
What do you mean by "self-sufficient test", I expect you're looking at the Debt Service Coverage Ratio, or something similar?
It's going to be difficult to find anything that cash flows in the Bay Area with current rates, and still harder with mortgage insurance on top of that. I do know that FHA loans can be assumable though, it might be worth trying to find a property with an existing FHA loan that you could assume.. have you seen any of those? I'm in San Diego, and I see assumable FHA loans from time to time. They go quick though!
Real Estate Agent · Bay Area · Member since 2022 · 25 posts · 19 votes
3y
Thx Scott! LMK if you see any that are assumable in SD!
It might be the same thing as to the Debt Service Coverage Ratio, where the market or current rent on 3 and 4-unit buildings rent has to cover (I think) 75% of the PITI. I have never seen it work on anything in the Bay Area as the rents are either too low, or the price of the property is too high if the property is vacant. I also heard that the insurance premiums on these loans right now are astronomical, so I was wondering if other markets are seeing the same thing for these loans... Duplexes are exempt from this rule.
Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes
3y
@Scott Scialabba@Nash Mittelman 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. 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.