Question about FHA Financing with Multifamily Houses

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Question about FHA Financing with Multifamily Houses

Scott Haney
Alpharetta, GA · Member since 2015 · 5 posts · 0 votes

Hey guys!  I'm a bit new to the game and I've been reading up on loads of articles on this website and a few others and believe I am starting to get a good base knowledge of real estate.  I'm a recent college graduate and saving up at my parents place before have enough money to move out (planning on sometime around May 2016).

My question about FHA financing is related to buying a multifamily house which is what I am considering doing when I move out to gain experience in the real estate world. Can anyone provide some good guidance or insight on experiences they have had with this? I am aware if you pursue FHA financing the owner must live in the unit.

Thanks!

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Logan AllecBusiness Member
Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
10y

In my opinion, it's the best person for a young person to get started investing in real estate. One thing to keep in mind when looking for an FHA owner-occupied triplex or fourplex is that 85% of the market rents on all four units need to cover your monthly payment (principal, interest, taxes, insurance, and mortgage insurance). This is known as the self-sufficiency rule. It only applies to 3- and 4-unit properties (not SFRs or duplex) bought using FHA financing. I put together a spreadsheet here to help potential house hackers quickly analyze whether or not a property qualifies. There are other FHA requirements concerning which you should contact your local lender, but determining whether or not a triplex or fourplex meets the self-sufficiency rule is a good place to start as this rule will immediately eliminate many properties from your search, especially in expensive markets like mine.

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  • Scott Haney
    OP
    Alpharetta, GA · Member since 2015 · 5 posts · 0 votes
    10y

    I think I was a bit off with my terminology.  I meant to relate it to buying a duplex, triplex, or fourplex

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  • Logan AllecBusiness Member
    Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
    10y

    In my opinion, it's the best person for a young person to get started investing in real estate. One thing to keep in mind when looking for an FHA owner-occupied triplex or fourplex is that 85% of the market rents on all four units need to cover your monthly payment (principal, interest, taxes, insurance, and mortgage insurance). This is known as the self-sufficiency rule. It only applies to 3- and 4-unit properties (not SFRs or duplex) bought using FHA financing. I put together a spreadsheet here to help potential house hackers quickly analyze whether or not a property qualifies. There are other FHA requirements concerning which you should contact your local lender, but determining whether or not a triplex or fourplex meets the self-sufficiency rule is a good place to start as this rule will immediately eliminate many properties from your search, especially in expensive markets like mine.

    Clarita CPA Group516 Reviews
    WebsiteView Page
    2Reply
  • Shirley Wilson
    Investor · Oceanside, CA · Member since 2015 · 2 posts · 0 votes
    10y

    Logan - thanks for posting your spreadsheet.  What does HOC stand for in the "Rents after HOC Vacancy Factor" column?

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  • Scott Haney
    OP
    Alpharetta, GA · Member since 2015 · 5 posts · 0 votes
    10y

    Thanks Logan!  I appreciate the spreadsheet!

    0Reply
  • Elizabeth Colegrove
    Hanford, CA · Member since 2013 · 5k+ posts · 1k+ votes
    10y

    That's what we plan on doing at our next location if we get Whidbey Island. The FHA loan will allow us to buy the unit with 3.5% down. The great thing is we will be able to count the income from the other three units making it easier to qualify.

    There are some downsides to this loan,

    *PMI for life

    * funding fee

    But the upsides as low downpayment are pretty awesome.

    1Reply
  • Bhavesh Patel
    Long Beach, CA · Member since 2015 · 16 posts · 1 vote
    10y

    I'm also noob, in escrow for my first property ever, so take my limited experiences with a grain of salt:

    FHA:

    -low down payment that allows you to get into a home w'out a big down payment (3.5%!)

    -you can only have one FHA loan at a time

    -has a point included in the financing - all FHA loans have it, most people roll it into the financing as a point. If you pay it to avoid that point, you end up putting about $12-$15k down; effectively canceling out the advantage of that low down payment

    -can fund up to 4 unit*** - BUT 3-4 unit homes do have a "Self Sufficiency Rental Income Eligibility" test that says that the PITI can NOT be less than 75% of the rents

    http://portal.hud.gov/hudportal/documents/huddoc?i...

    ^^ read the bottom of pdf page #152 and the top of page #153 (LAST UPDATED 9/14/15)

    In socal, this is ridiculous because the 3-4 plexes are $700k++ and there is no way 75% of the rents are going to be greater than the mortgage payment without a huge down payment. I was looking at a $725,000 property, and needed something like a $130,000 down payment to have it pass this test. So much for 3.5% down...

    On the other hand, a sufficiency test would never work on a duplex...so, it does not apply, and you can finance up to ~$725k with that low down payment. 

    In summary, without a big down payment, going FHA means you can buy -

    -a single family home/townhome/condo

    -a duplex

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  • Upen PatelPro Member
    Lender · Nationwide Lender · Member since 2015 · 1k+ posts · 814 votes
    10y
    Originally posted by @Elizabeth Colegrove:

    That's what we plan on doing at our next location if we get Whidbey Island. The FHA loan will allow us to buy the unit with 3.5% down. The great thing is we will be able to count the income from the other three units making it easier to qualify.

    There are some downsides to this loan,

    *PMI for life

    * funding fee

    But the upsides as low downpayment are pretty awesome.

    If you put 10% down on a FHA loan, then the PMI will fall off in 11 yrs (better then life). Can't avoid the funding fee.

    [email protected]571-200-6180
    1Reply
  • Elizabeth Colegrove
    Hanford, CA · Member since 2013 · 5k+ posts · 1k+ votes
    10y
    Originally posted by @Upen Patel:
    Originally posted by @Elizabeth Colegrove:

    That's what we plan on doing at our next location if we get Whidbey Island. The FHA loan will allow us to buy the unit with 3.5% down. The great thing is we will be able to count the income from the other three units making it easier to qualify.

    There are some downsides to this loan,

    *PMI for life

    * funding fee

    But the upsides as low downpayment are pretty awesome.

    If you put 10% down on a FHA loan, then the PMI will fall off in 11 yrs (better then life). Can't avoid the funding fee.

     That's a great point. Unfortunately part of my point of this loan is the low payment

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  • Billy Joseph
    Investor · New York City, NY · Member since 2016 · 25 posts · 4 votes
    10y

    Hi @Logan Allec I'm actually working through an FHA mortgage with a lender now. One thing I am finding is that the self-sufficiency rule now has been lowered to 75% of market rents of all units. The issue I am having is that currently there are month-to-month rents with no official lease documents in place that are well below market rent. If the lender used the below market current rents I cannot pass this test. However, I know if using the market rates this would not be an issue. Do you know if appraisers will use market rates rather then the actual rental payments when there are no formal leases in place?

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