FHA Fair Market Rent

[Larry Long]

Trying to buy a 3-unit building using FHA loan. I qualify for the property using just my income, no rental income. The underwriter is still requiring that we have a fair market rent evaluation done and the rent numbers that the appraiser came up with aren't adding up to the mortgage payment. Not understanding why I need that if I qualify with just my income. Anyone run into this problem? Supposed to close tomorrow.

[Albert Bui]

Originally posted by @Larry Long:

Trying to buy a 3-unit building using FHA loan. I qualify for the property using just my income, no rental income. The underwriter is still requiring that we have a fair market rent evaluation done and the rent numbers that the appraiser came up with aren't adding up to the mortgage payment. Not understanding why I need that if I qualify with just my income. Anyone run into this problem? Supposed to close tomorrow.

This is a topic discussed at length here on BP. You've basically run up against the self sufficiency rule which means the gross rents as determined by an appraiser or actual market rents (the lower of either) at 75% must be equal to or greater than the monthly PITI of the property (prin/int/tax/ins).

Why would FHA want this? If the property is ever taken back they simply want to cashflow like any other real estate investor would and they've determined that 75% of gross rents cannot be higher than your monthly PITI is their way of protecting themselves.

This also protects investors against what they(FHA) deem to be ignorance.

Strategies around it? 

- switch to home possible freddie mac (beware of income limits)

- bring more cash for larger down payment

- use 5/1 ARM

- permanent rate buy down strategies

- negotiate your insurance carriers annual rate/premium

- make sure you're using actual property taxes and not the lenders arbitrary rate that may or may not be higher than  your actual taxes

- and others

If you have any questions feel free to let me know.