FHA Funding in Los Angeles Area on a 4-Unit Building

[Christi Lane]

Hello! I am looking into House Hacking in the local area where I live (Los Angeles/Orange County). I spoke with a lender about the possibilities of doing an FHA loan on a 4-unit building. He said that in order to qualify for the FHA loan that the property essentially needed to cash flow positively even with you living in one of the units. Is this correct? Are there any creative ways around this? It is hard to find positively cash-flowing properties in Southern California in general. Otherwise, my only other option would be to do a conforming loan with a minimum of 20% down. (Trying to use as little out-of-pocket $$ as possible.)

Looking to pick something up with 3.5% down up to $1.2M in the Long Beach area. 

Any thoughts on what I should do? Thanks! 

[Grant Schroeder]

Hello @Christi Lane, great question! What the lender you spoke with is talking about is called the self-sufficiency test where the other 3 units of your quad need to cover the entire PITI of your mortgage. It is one of the requirements for 3 & 4 unit properties on FHA loans. It is even harder to get these numbers to work on a triplex wiht only 2 units' rent. FHA requires us as lenders to use the lesser of current rents in the other 3 units vs. what the appraiser deems market. Many property owners who are selling their Small Multis do not have rents at market rent, so this can definitely hurt the property from passing the self-sufficiency test.
For a duplex with an FHA loan, you can put 3.5% down, but it does not need to meet a self-sufficiency test. This is the cleanest way to use the FHA loan with 3.5% down and not have to worry about FHA's self-sufficiency test.

For a conventional loan, you need 15% down on a duplex and 20% down on a 3-4 unit. There are also portfolio options with 10% down and no MI that you might want to explore if you have the funds available for your house hack.

Please let me know if you have further questions about the details of all this! I am glad to help.