FHA loans and the deal killing self sufficiency test

[Nash Mittelman]

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!

[Caroline Gerardo]

@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.