FHA Multifamily Rental Qualification

[Don Pham]

Hello all,

I had a question about FHA loans on multifamily properties, specifically about how projected rents factor into the debt ratio qualifications. Specifically,

Does the expected rental income offset the PITI for the 31% requirement or is it instead added to income for that calculation?

For example, PITI + MIP = 3,800 and expected market rents of the other units are 3,500.
Borrower's monthly income = 4,000
75% of 3,500 = 2,625

Is the calculation then 3,800 - 2,625 = 1,175 which is < 31% of 4,000 (qualifies)
or
3,800 > 31% of 4,000 + 2,625 (not qualified)

Thanks in advanced for your awesome answers!

[Julee Felsman]

Hi Don!

Great question! FHA figures things the less generous way...

In your example, you would add 75% of the rents from the other units ($2625) to the $4000 income from other sources for $6625 total income. If PITI is 3800, the front DTI would be 57%.

Most loans are underwritten using an automated underwriting system that grants a lot of leeway to the standard 31% DTI, but 57% is likely higher than would be approved. But I've recently gotten approvals close to or even a little over 50%.

The other incredibly important thing to know about FHA loans on 3 or 4 unit properties is that FHA requires that you check two extra boxes.

1) you must have 3 months of your new payment (PITI, MI, etc) in savings after closing. These funds must be from your own sources -- gifts are not allowed.

2) the property must pass a "self-sufficiency test". 75% of the market rents on all units (even the one you're going to live in) must equal or exceed the PITI. The rents used are what the appraiser gives. In higher cost markets this test can be really hard (if not impossible) to pass if you want to make a low down payment. There's some more nuance to this and I have some suggestions as to how to aid the appraiser in coming up with the most realistic possible rent numbers.

Cheers!

Julee