Qualifying for FHA for MultiFamily unit

[Jalpan Jangiani]

Hello Fellow House Hackers,

This is a follow up post to my previous one. I got a really good response from all of you, which motivated me to proceed to the next step.

So I reached out to my lender regarding my interest for Primary Residence Multi Family Property (preferably 3-4 units) with 5% down. She told me that the rents of all units have to be pretty high to qualify for 3-4 units with 5% down. They only consider 70% of the rental income towards the mortgage payment. 

1) Have any of you had troubles qualifying with this strict requirements? (My location is Alameda, CA)

2) Do you advice me to go with FHA or find some jumbo option?

3) Any of you familiar with DSCR type loan? She says we still require 20-25% down for this as well.

[Anastasia G.]

@Jalpan Jangiani Hello!

If you were to live in the property and rent out units - then FHA is a go..However you have to be mindful on the following when it comes to 3-4 units using FHA:

❇️ Net Self-sufficiency test: rental income produced must cover mortgage payment, if rental income does not cover mortgage payment then you are not able to use FHA with 3.5% down, you would need to either increase down payment or explore conventional/non traditional financing
❇️"Net Self-Sufficiency Rental Income is calculated by using the Appraiser’s estimate of fair market rent from all units, including the unit the Borrower chooses for occupancy, and subtracting the greater of the Appraiser’s estimate for vacancies and maintenance, or 25 percent of the fair market rent." (from guidelines)
❇️ If you need rental income to qualify, you cannot just use 75% of market rent (assuming units are vacant); Effective rental is  the LESSER of 75% of Fair Market Rent/lease rent or the Net Operating income reported on Fannie Mae Form 216/Freddie 998 - this is where a lot can go wrong..you are literally at the mercy of the appraiser and underwriter..

In high cost areas like CA,NY, NJ it becomes challenging to finance 3-4 Unit property using FHA due to this self-sufficiency test.

It is important to work with lender that understands this and has experience with fha multifamily; Sometime we have to challenge appraiser and underwriter when it comes to the test & rental income. I highly recommend to run calculations before you even see the property. We empower our clients with all types of calculators, including with FHA Self-sufficiency worksheet.

Hope this helps! Feel free to reach out with any questions.