Failing FHA self sufficiency test options

Buying & Selling Real Estate
8yFollow

Failing FHA self sufficiency test options

Daniel Coleman
Lacey, WA · Member since 2014 · 4 posts · 0 votes

Hello All,

I am actually helping a friend who is trying to purchase a quadplex, but a very unique quad plex.  THis partular quad is a single parcel, but actually is as follows:

2bd 1 bath 1100sq ft SFH

2bd 1 bath 900sq ft SFH

1bd 1 bath 660sq ft duplex

Studio 450sq ft duplex

This is the issue. The FHA appraiser appraised the value fine, but when he appraised the rents he is WAY off. Not to mention first off the rents that have been collected are as follows:

1050- 2bd 1100sq ft 

1000- 2bd 900sq ft

920- 1bd

800 -studio

FHA Market rents based on appraisal:

1120-2bd 1100sq ft

770-2b 900sq ft

575-1bd

400-studio

The PITI is around 2460 while this only hits 2148 after the 25% vacancy rule for FHA. I have provided comps closer (3.8 miles away) compared to the comps that the appraiser used (10 miles away) and he says he wants something closer. Also the appraiser used actual 4plex apartment buildings as his comps where this is nothing like that. My question is what options do we have to convince the appraiser, does anyone know of a conventional mortgage for a owner occupied 4plex that is less than 25%?

thanks in advance

0Reply
22 views

Most Popular Reply

Albert Bui
Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
8y
Originally posted by @Daniel Coleman:

Hello All,

I am actually helping a friend who is trying to purchase a quadplex, but a very unique quad plex.  THis partular quad is a single parcel, but actually is as follows:

2bd 1 bath 1100sq ft SFH

2bd 1 bath 900sq ft SFH

1bd 1 bath 660sq ft duplex

Studio 450sq ft duplex

This is the issue. The FHA appraiser appraised the value fine, but when he appraised the rents he is WAY off. Not to mention first off the rents that have been collected are as follows:

1050- 2bd 1100sq ft 

1000- 2bd 900sq ft

920- 1bd

800 -studio

FHA Market rents based on appraisal:

1120-2bd 1100sq ft

770-2b 900sq ft

575-1bd

400-studio

The PITI is around 2460 while this only hits 2148 after the 25% vacancy rule for FHA. I have provided comps closer (3.8 miles away) compared to the comps that the appraiser used (10 miles away) and he says he wants something closer. Also the appraiser used actual 4plex apartment buildings as his comps where this is nothing like that. My question is what options do we have to convince the appraiser, does anyone know of a conventional mortgage for a owner occupied 4plex that is less than 25%?

thanks in advance

To combat the SS or FHA self sufficiency rule its relatively simple because its basically a ratio you need to meet or exceed.

This ratio is:

75% of the Gross rents (lower of market rents by appraiser or current rents) for all units (even the owner occupied one) must be equal to or greater than the PITI on the property (prin/interest/taxes/insurance).

A quick rule of thumb I use to eye ball these types of deals and its not 100% accurate but its probably 95% is that the gross monthly rents of all units must equal .90% of the sales price with FHA (assuming 3.5% down & prevailing FHA rate + FHA MI/etc) in order to meet this SS rule.

When a property dips below .90% rent to value ratio or rent to sales price we seem to have an issue with this SS rule.

So what does this all mean behind all the lending hoopla? 

Yup you basically cant buy in core seattle/bellevue/etc using FHA if you're only putting down 3.5%, because the rent to value ratios are like .40-.55% of the sale price on the monthly rent/price ratio.

You can however put a huge amount of money down to make the ratio work or you dont use FHA, but if you put a huge amount of money down then why go FHA right? You mind as well go with conventional and avoid the monthly MI of .80-.85% and upfront MI premium of 1.75% which is nearly 2 points. Its like borderline hard money points upfront with a good low fixed rate for 30 years, my two cents.

2Reply
See this reply in the discussion

18 Replies

Jump to latestLatest
  • Shaun Weekes
    Loan Officer / Processor / Life & Health Agent · Rancho Cucamonga, CA · Member since 2014 · 1k+ posts · 757 votes
    8y

    FHAs vacancy is 85% so you're off by less than $30.

    Put down .5% or 1% more and you'll be fine.

    Make sure your lender truly understand's FHA guidelines.

    2Reply
  • Daniel Coleman
    OP
    Lacey, WA · Member since 2014 · 4 posts · 0 votes
    8y
    Originally posted by @Shaun Weekes:

    FHAs vacancy is 85% so you're off by less than $30.

    Put down .5% or 1% more and you'll be fine.

    Make sure your lender truly understand's FHA guidelines.

     We were told its 75% here in Washington State. 

    0Reply
  • Harjeet BhattiPro Member
    Lender · Glenview IL- CDLP NMLS#230554 · Member since 2015 · 2k+ posts · 747 votes
    8y

    According to guidelines lender lender can take the monthly operating income reported on FHLMC 998 form or 75% of the lessor of :

    Fair market rent reported by the appraiser or

    The rent reflected on the existing or proposed lease agreement. 

    You can challenge the comps if you have other good comps in the area. Your lender can help in this process. 

    Home possible is other option for 2-4 units with 5% down payment. 

    1Reply
  • Daniel Coleman
    OP
    Lacey, WA · Member since 2014 · 4 posts · 0 votes
    8y
    Originally posted by @Harjeet Bhatti:

    According to guidelines lender lender can take the monthly operating income reported on FHLMC 998 form or 75% of the lessor of :

    Fair market rent reported by the appraiser or

    The rent reflected on the existing or proposed lease agreement. 

    You can challenge the comps if you have other good comps in the area. Your lender can help in this process. 

    Home possible is other option for 2-4 units with 5% down payment. 

    Correct me if I am wrong, but you are quoting guidelines for Fannie Mae with FHLMC 998 correct? FHA doesn't mention this form in HUD 4000.1. Also comps are near impossible to challenge because the appraiser refuses to acknowledge them as separate houses (which they are) and the only thing close are actual 4 plex apartments over 10 miles away. The location of this property is more rural with all single family homes nearby. Closest comp I could find was my own property 3.8 miles away and it is a 900sq ft duplex that according to him was too far.

    Home Possible is not Possible at my friends income level.  For the area it would need to be under 76k/year.

    0Reply
  • Shaun Weekes
    Loan Officer / Processor / Life & Health Agent · Rancho Cucamonga, CA · Member since 2014 · 1k+ posts · 757 votes
    8y
    Originally posted by @Daniel Coleman:
    Originally posted by @Shaun Weekes:

    FHAs vacancy is 85% so you're off by less than $30.

    Put down .5% or 1% more and you'll be fine.

    Make sure your lender truly understand's FHA guidelines.

     We were told its 75% here in Washington State. 

    As far as I know FHA loan limits change from county to county but the 85% should be nation wide. I will ask my underwriters and post the answer tomorrow.

    0Reply
  • Harjeet BhattiPro Member
    Lender · Glenview IL- CDLP NMLS#230554 · Member since 2015 · 2k+ posts · 747 votes
    8y

     If comps are not available and you have better comps most of the time appraiser do consider specially in rural area where comps are not available.

    Its from HUD 4000.1. Please see below:-

    0Reply
  • Harjeet BhattiPro Member
    Lender · Glenview IL- CDLP NMLS#230554 · Member since 2015 · 2k+ posts · 747 votes
    8y

     If comps are not available and you have better comps most of the time appraiser do consider specially in rural area where comps are not available.

    Its from HUD 4000.1. Please see below:-

    0Reply
  • Daniel Coleman
    OP
    Lacey, WA · Member since 2014 · 4 posts · 0 votes
    8y
    Originally posted by @Shaun Weekes:
    Originally posted by @Daniel Coleman:
    Originally posted by @Shaun Weekes:

    FHAs vacancy is 85% so you're off by less than $30.

    Put down .5% or 1% more and you'll be fine.

    Make sure your lender truly understand's FHA guidelines.

     We were told its 75% here in Washington State. 

    As far as I know FHA loan limits change from county to county but the 85% should be nation wide. I will ask my underwriters and post the answer tomorrow.

    This would be amazing if true.  I appreciate it.

    0Reply
  • Shaun Weekes
    Loan Officer / Processor / Life & Health Agent · Rancho Cucamonga, CA · Member since 2014 · 1k+ posts · 757 votes
    8y
    Originally posted by @Daniel Coleman:
    Originally posted by @Shaun Weekes:
    Originally posted by @Daniel Coleman:
    Originally posted by @Shaun Weekes:

    FHAs vacancy is 85% so you're off by less than $30.

    Put down .5% or 1% more and you'll be fine.

    Make sure your lender truly understand's FHA guidelines.

     We were told its 75% here in Washington State. 

    As far as I know FHA loan limits change from county to county but the 85% should be nation wide. I will ask my underwriters and post the answer tomorrow.

    This would be amazing if true.  I appreciate it.

     Sorry for the late response.  I spoke with my UW and she confirmed that 85% is good throughout the 50 States.  You're lender probably has an OVERLAY and that's why they're only taking 75%.

    I hope this helps and have a wonderful day.

    0Reply
  • Albert Bui
    Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    8y
    Originally posted by @Daniel Coleman:
    Originally posted by @Shaun Weekes:

    FHAs vacancy is 85% so you're off by less than $30.

    Put down .5% or 1% more and you'll be fine.

    Make sure your lender truly understand's FHA guidelines.

     We were told its 75% here in Washington State. 

    Self Sufficiency is different than the discount to calculate actual rental income, the SS test is a separate FHA test to make sure that if FHA had to take back this property they will have sufficient cash flow to service their investors debt. FHA is guarantee'ing this money with their mortgage insurance fund so this is like a safeguard guideline to insure they dont go bust like in 2008-2010 when they had to raise their FHA premiums like crazy.

    85% is a factor to discount the gross income to calculate net rents for income and DTI purposes although most lenders will default to 75% of gross either as an overlay or some areas are in fact 75% depending on the HUD/FHA area.

    The 75% for the self sufficiency rule (SS) is separate, basically FHA takes the "lower," of current leases or appraisers determination of market rents.

    Often times the appraisers have been coming in low making it extremely difficult to qualify with SS on 3-4 units. The SS rule only applies to 3-4 units and not 1-2 unit properties.

    The strategy around this is to use VA is you're a veteran borrower or if you have served or use Home Possible Freddie Mac which can finance up to 95% LTV or 5% down on up to 4 units (not all lenders allow the 4 units but the program itself does).

    There are stratgies as well to work around the SS rule when sticking with FHA. Make sure your lender knows these rules intimately upfront so you can preplan things such as proactively reviewing lease agreements and working in advance of submission of the file. Once the file is in and the appraiser has his/her opinion out about those market rents then the cat is out of the bag so to speak.

    Best of luck.

    1Reply
  • Albert Bui
    Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    8y
    Originally posted by @Daniel Coleman:

    Hello All,

    I am actually helping a friend who is trying to purchase a quadplex, but a very unique quad plex.  THis partular quad is a single parcel, but actually is as follows:

    2bd 1 bath 1100sq ft SFH

    2bd 1 bath 900sq ft SFH

    1bd 1 bath 660sq ft duplex

    Studio 450sq ft duplex

    This is the issue. The FHA appraiser appraised the value fine, but when he appraised the rents he is WAY off. Not to mention first off the rents that have been collected are as follows:

    1050- 2bd 1100sq ft 

    1000- 2bd 900sq ft

    920- 1bd

    800 -studio

    FHA Market rents based on appraisal:

    1120-2bd 1100sq ft

    770-2b 900sq ft

    575-1bd

    400-studio

    The PITI is around 2460 while this only hits 2148 after the 25% vacancy rule for FHA. I have provided comps closer (3.8 miles away) compared to the comps that the appraiser used (10 miles away) and he says he wants something closer. Also the appraiser used actual 4plex apartment buildings as his comps where this is nothing like that. My question is what options do we have to convince the appraiser, does anyone know of a conventional mortgage for a owner occupied 4plex that is less than 25%?

    thanks in advance

    To combat the SS or FHA self sufficiency rule its relatively simple because its basically a ratio you need to meet or exceed.

    This ratio is:

    75% of the Gross rents (lower of market rents by appraiser or current rents) for all units (even the owner occupied one) must be equal to or greater than the PITI on the property (prin/interest/taxes/insurance).

    A quick rule of thumb I use to eye ball these types of deals and its not 100% accurate but its probably 95% is that the gross monthly rents of all units must equal .90% of the sales price with FHA (assuming 3.5% down & prevailing FHA rate + FHA MI/etc) in order to meet this SS rule.

    When a property dips below .90% rent to value ratio or rent to sales price we seem to have an issue with this SS rule.

    So what does this all mean behind all the lending hoopla? 

    Yup you basically cant buy in core seattle/bellevue/etc using FHA if you're only putting down 3.5%, because the rent to value ratios are like .40-.55% of the sale price on the monthly rent/price ratio.

    You can however put a huge amount of money down to make the ratio work or you dont use FHA, but if you put a huge amount of money down then why go FHA right? You mind as well go with conventional and avoid the monthly MI of .80-.85% and upfront MI premium of 1.75% which is nearly 2 points. Its like borderline hard money points upfront with a good low fixed rate for 30 years, my two cents.

    2Reply
  • Ryan Swan
    Real Estate Agent · Phoenix, AZ · Member since 2012 · 640 posts · 457 votes
    8y

    @Albert Bui you provided some really great insight!

    Is the 85% discount factor used on every FHA 3-4 unit under writing, or only in certain states/areas?

    Does the discounted rent have to exceed the 75% self sufficiency number, or are those two unrelated? 

    The 75% Self Sufficiency number never made sense to me on 3-unit properties. It makes sense on 4-unit properties since the 4th unit would be occupied by the buyer and thus out of service, leaving 3/4 or 75% of rent income. Am I looking at it the wrong way? 

    1Reply
  • Albert Bui
    Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    8y
    Originally posted by @Ryan Swan:

    @Albert Bui you provided some really great insight!

    Is the 85% discount factor used on every FHA 3-4 unit under writing, or only in certain states/areas?

    Does the discounted rent have to exceed the 75% self sufficiency number, or are those two unrelated? 

    The 75% Self Sufficiency number never made sense to me on 3-unit properties. It makes sense on 4-unit properties since the 4th unit would be occupied by the buyer and thus out of service, leaving 3/4 or 75% of rent income. Am I looking at it the wrong way? 

    The test has nothing to do with the number of units.

    The 75% use of gross rental income has nothing to do with the number of units. It’s merely a discounting factor to account for operating expenses of a property.

    FHA self sufficiency rule applies to 3-4 unit properties only not 1-2 unit FHA properties.

    If you have a non occupant coborrower in a 3-4 unit your min down payment also goes from 3.5% to 25% down so basically you’re going to want all occupant borrowers to qualify on their own. 

    0Reply
  • Ryan Swan
    Real Estate Agent · Phoenix, AZ · Member since 2012 · 640 posts · 457 votes
    8y

    @Albert Bui I know the 75% SS test is used regardless of whether it's a 3 or 4 unit building, just saying it seems like it should be 66% for a 3 unit. 

    Can you please elaborate on the discount calculation from your first post? 

    0Reply
  • Albert Bui
    Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    8y
    Originally posted by @Ryan Swan:

    @Albert Bui I know the 75% SS test is used regardless of whether it's a 3 or 4 unit building, just saying it seems like it should be 66% for a 3 unit. 

    Can you please elaborate on the discount calculation from your first post? 

     It may seem like it should be 66% but you wouldn’t like that because a net rental income of 66% amounts to less of your rental income you’re able to be used to qualify your debt to income or your SS rule.

    As for the rental calculation it's pretty much 75% everywhere however if we're talking technically FHA rental discount varies by area and in a lot of CA areas It's 85%. Just because it is 85% doesn't mean banks will use that as most have overlays to use 75%. This rental calc variance is just for actual rental income calculation not for SS rule calculation. So it's important not to confuse the two.

    1Reply
  • Albert Bui
    Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    7y
    Originally posted by @Daniel Coleman:
    Originally posted by @Shaun Weekes:

    FHAs vacancy is 85% so you're off by less than $30.

    Put down .5% or 1% more and you'll be fine.

    Make sure your lender truly understand's FHA guidelines.

     We were told its 75% here in Washington State. 

    There are HUD rental factors but most lenders use 75% maybe back in 2012 I've used the .85% before in orange county but each HUD area has a different rate irrespective of what lenders actually use.

    0Reply
  • Tim Lucas
    Investor · Redmond, WA · Member since 2021 · 54 posts · 27 votes
    3y

    Here's an FHA self sufficiency calculator that uses a 25% vacancy factor which sounds like what most of the country uses. Could be a good tool to use to run preliminary numbers on a property. https://thisismortgage.com/fha-self-sufficiency-test-calculator/

    0Reply
  • Derrick Diazoni
    Member since 2023 · 1 post · 0 votes
    3y

    Does anyone know if you can get a lender to use a bigger number for the SS test by saying you’ll go Section 8? Then the government will guarantee a minimum income on the units…

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free