Quote from @Rhea Jeong:
Hello all,
I am first time investor and I’m looking at multi family houses in NJ. With my current salary I can only borrow 300k and it will give me limited directory in the market I’m looking at. I heard some lenders would consider future rent that I will collect from the property even if it’s just 7-80% of it, and when I talked to two mortgage lenders so far they said it won’t be counted until I actually have the rent come into my bank. This means I can’t bump up my purchasing power. If anyone can advise me if this is true or I should try harder to find a lender who is willing to, I would appreciate!!
FYI, I want to get down payment assistance so it has to be the lenders among the list from the state.
Thank you guys!
Hi Reah,
Assuming you're going to occupy one of the units, here are the FHA guidelines. You can count up to 75% of the rental income from each unit BUT you have to pass the FHA self sufficiency test.
The FHA (Federal Housing Administration) Self-Sufficiency Test is a guideline used for evaluating the eligibility of borrowers looking to purchase multi-unit properties (specifically, 3- or 4-unit properties) with an FHA loan. The purpose of this test is to ensure that the property generates enough rental income to cover the property's mortgage payment, including principal, interest, taxes, insurance, and homeowners association dues (if applicable).
Key Points of the FHA Self-Sufficiency Test:
- Applicable Properties: The self-sufficiency test applies only to 3- or 4-unit properties being purchased or refinanced with an FHA loan. It does not apply to 1- or 2-unit properties.
- Income Calculation: To conduct the test, FHA requires that the estimated rental income from all units, including the one in which the borrower will reside (if the borrower is not occupying the unit as their primary residence), be calculated. The calculation typically uses 75% of the property's gross rental income (as determined by an appraiser) to account for potential vacancies and maintenance costs.
- Monthly Payment Calculation: The total monthly mortgage payment includes principal, interest, property taxes, homeowners insurance, mortgage insurance premiums (MIP), and any homeowners association dues.
- Test Requirement: To pass the self-sufficiency test, the calculated rental income must be equal to or greater than the monthly mortgage payment. In other words, the adjusted rental income (75% of the gross rents) must be sufficient to cover the total mortgage payment of the property.
Example of the FHA Self-Sufficiency Test Calculation:
- Gross Rental Income: Assume the appraiser estimates the total gross rental income from all units is $4,000 per month.
- Adjust Rental Income for Vacancy: Multiply the gross rental income by 75% to account for vacancies and maintenance costs.
$4,000 x 0.75 = $3,000 - Monthly Mortgage Payment: Assume the total monthly mortgage payment (PITI + MIP) is $2,800.
Result:
Since the adjusted rental income ($3,000) is greater than the monthly mortgage payment ($2,800), the property passes the FHA self-sufficiency test.
Importance of the Test:
The self-sufficiency test is crucial for borrowers looking to finance a 3- or 4-unit property with an FHA loan. It ensures that borrowers are purchasing properties that have the potential to cover their expenses with rental income, reducing the risk of default for both the borrower and the FHA. If a property does not pass the self-sufficiency test, the borrower may not qualify for an FHA loan for that property.
Using a DPA comes at the cost of a higher rate which makes passing the SST more difficult.
