How strict is the FHA Self Sufficiency test?

New to Real Estate · Austin Texas · Member since 2020 · 24 posts · 4 votes

I'm looking at buying in an off market 4-Plex in Austin Texas using FHA financing where passing the self sufficiency test is iffy.

In my calculations, 75% of the total rent covers approximately 100% of the PITI. However, there is not much room for deviation here.
If the appraiser finds that the fair market rent is a bit less and the calculation then shows that 75% of the total rent covers 95% or 90% of the entire mortgage, is the whole financing deal a no-go?

Does the underwriter take into account my income or credit history as a factor for leniency on this rule?

Thanks and let me know,

Ben

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Albert Bui

Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes

Quote from @Ben Hunt:

I'm looking at buying in an off market 4-Plex in Austin Texas using FHA financing where passing the self sufficiency test is iffy.

Ben

The test immutable and has zero margin of error. With that said though there are ways to adjust rents, prepare for higher rents for the appraisers comps and is based on the appraisers opinion of market rents versus the PITIA or monthly payment (principal/interest/taxes/insurance/assessments).

You can work the upper end of the equation which is the income and fix up the units to get a higher opinion of rental values or you can work the denominator which is the expense side of the equation by:

- putting more money down (the worst solution of them all since it counters the whole thesis of why you're using FHA in the first place)
- you can buy down the rate on the 30 year
- you can switch to the 5/1 ARM FHA to get a lower rate and cheaper buy downs between rates (FHA underwriters qualify because on the note rate on FHA even with ARM's or adjustable rate mortgages)
- you can get a lower insurance quote
- you CANNOT mess with property taxes unless you know a politician locally (joking of course)

At the end of the day the FHA SS or self sufficiency rule only has a numerator or denominator and you can work all ends but there isnt much else to make sure you can get the maximum loan amount per fha guidelines.

A good investor and lender will be able to help you maximize both or prepare you in advance so that you dont deal with this stuff at the 11th hour (if you do you will be the best prepared you can possibly be prior to the application date).

Best of luck,

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Russell BrazilBusiness Member
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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
6y
This is where you need to have a good agent involved who has a lot of experience working with appraisers. If you are close, a good agent can likely make it happen while as a layman, you will probably come up short.
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Ben Hunt
OP
New to Real Estate · Austin Texas · Member since 2020 · 24 posts · 4 votes
6y
@RussellBrazil, are you implying that the underwriter will treat the rule as strict with no exceptions?
0 Reply
Jacob Pereira
Real Estate Agent · Austin, TX · Member since 2014 · 636 posts · 486 votes
6y
as @Russell Brazil said, make sure you have an experienced agent involved if it's that close. I'd also like to add that a lender that has a good working relationship with your agent can help as well, especially when it comes to the vacancy estimate. There are a lot of safeguards put in place since the housing crash to keep lenders and agents from influencing appraisers too much, but there are definitely things that can be done in order to hit your numbers.
Can I ask why you specifically want to use FHA? There are low-down payment conventional loans out there as well that have much less stringent requirements.
0 Reply
Ben Hunt
OP
New to Real Estate · Austin Texas · Member since 2020 · 24 posts · 4 votes
6y
@Jacob Pereira I can only put down a max of like 7% and I haven't found any conventional loans that go that low on the down payment.

I am really wondering though as to whether the rule is a hard and strict rule or whether there is leniency in it given other factors.
0 Reply
Ryan Avila
Rental Property Investor · Napa, CA · Member since 2016 · 69 posts · 75 votes
6y
@Ben Hunt
To answer your question, lenders can't waiver or make exceptions to the self sufficiency rule. This is a FHA lending requirement that has nothing to do with the lender. They will not take any other factors into account i.e. W2 income. All they are looking at is simply does 75% of rents cover 100% PITI and vacancy.
The equivalent of what your asking is, if I any trying to get a loan that requires 5% down but I only have 4% will the underwriter let it slide? The answers is no they will not.
1 Reply
Ben Hunt
OP
New to Real Estate · Austin Texas · Member since 2020 · 24 posts · 4 votes
6y
@Ryan Avila, I just read through as much of the official document as possible and didn't see this test directly.

In sections,6 Manual Underwriting of the Borrower, and 5 Underwriting the Borrower using the TOTAL mortgage scorecard, the only mention was that the total rental income would be calculated by PITI - 75% of appraised rents. If the value is a negative amount it would be counted against the borrowers' gross monthly income.

Where do you see in the official documents that it's a pass/fail rule?

https://www.hud.gov/sites/dfil...

0 Reply
Jacob Pereira
Real Estate Agent · Austin, TX · Member since 2014 · 636 posts · 486 votes
6y
@Ben Hunt, there are definitely conventional loans that allow for less down than that, although you would need to be highly qualified. I assume you've already talked to a lender about this? I've never personally had a client who got a loan this low, but you can get down to 3% without FHA if you check the right boxes. You will of course have to pay PMI.
1 Reply
Ryan Avila
Rental Property Investor · Napa, CA · Member since 2016 · 69 posts · 75 votes
6y
@Jacob Pereira

If Ben is asking about the self sufficiency test it’s because he is looking to purchase either a 3 or 4 unit property. I don’t not know of any loan products that require less then 15% down for a 3 unit owner occupied conventional. Do you know of any?

@Ben Hunt
Try here. https://archives.hud.gov/offic...
Also keep in mind the self sufficiency test does not include the income from the unit you will be occupying. So if it's a three unit, the income will be based off the two units you will be renting out. The only reason I know all of this is because I tried to do exactly what your doing and the loan got denied due to self sufficiency. I had more then enough income and a low enough DTI that I could have cover the PITI without any rental income but that didn't matter, loan was still denied.
3 Reply
Ben Hunt
OP
New to Real Estate · Austin Texas · Member since 2020 · 24 posts · 4 votes
6y
@Ryan Avila, thanks for the feedback given your real life experience.

I think that archive you shared is old however, from 2012.
0 Reply
Johnny McKeonPro Member
Rental Property Investor · Mesa, AZ · Member since 2016 · 103 posts · 72 votes
5y
Handbook 4000.1

"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."

(a) Definition
Net Self-Sufficiency Rental Income refers to the Rental Income produced by
the subject Property over and above the Principal, Interest, Taxes, and
Insurance (PITI).
(b) Standard
The PITI divided by the monthly Net Self-Sufficiency Rental Income may not
exceed 100 percent for three- to four-unit Properties.
(c) Calculation
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.
I'm attempting to use FHA 3.5% down for a 4plex right now.
2 Reply
Johnny McKeonPro Member
Rental Property Investor · Mesa, AZ · Member since 2016 · 103 posts · 72 votes
5y
i was successful and purchased my 3rd
4-Plex December 2020 and used FHA 3.5% to house hack. my 4-Plex almost didn't pass the self sufficiency test.
0 Reply
Jessica Young
Investor · Houston, TX · Member since 2018 · 20 posts · 7 votes
5y
@Johnny McKeon you mind sharing your numbers? I think I may run into an issue with self sufficiency
1 Reply
Johnny McKeonPro Member
Rental Property Investor · Mesa, AZ · Member since 2016 · 103 posts · 72 votes
5y
Originally posted by @Jessica Young:
@Johnny McKeon you mind sharing your numbers? I think I may run into an issue with self sufficiency

This is my third 4-Plex #pepper4plex I'm househacking.
(live in 1 unit, rent the other 3 out and live for free)

I used FHA owner-occupied loan with a 3.5% down-payment. closed 12/20/2021

asking price $575k
purchase price - $550,000
down-payment (3.5%) $19,250
30yr fixed rate mortgage
interest rate - 2.25%
seller concession $3,000
UFMIP $9,625k rolled into loan amt.

[expenses]

PITI (Principle,Interest,taxes, insurance )
$2,252 + $371.90 mortgage insurance
=$2,624
utilities (water, sewer, trash) varies
$270

[ potential Income ]
After remodel
rents $1,325 x 3 =$3,975
bill back utilities- $270

the best part is after a year I can
rent out all 4 units and repeat this process over with another 4-Plex.

House hacking is a great way to grow your rental portfolio with low down payment loans, live for free & increase your monthly cash flow. i have pics in my BP profile & I.g. account
0 Reply
Roseann Scrivens
San Pedro, CA · Member since 2017 · 21 posts · 13 votes
5y
@Johnny McKeon
Your potential rents of $3975*.75 = $2981

That is more than your PITI of $2624. So that property does meet the sustainability test, unless I'm missing something?

How does it work if there’s actual rents but potential rents are much higher? The place I’m looking at would meet the test if rents were at market rate.
0 Reply
Jason Argonaut
Member since 2021 · 2 posts · 1 vote
5y
I don't know if anybody mentioned this, but he can only go via FHA if he wants to put less than 25% down, specifically on a 4 plex. That is my understanding as a laymen.
1 Reply
Orlando Goodon
Member since 2018 · 125 posts · 21 votes
4y
Quote from @Johnny McKeon:

Originally posted by @Jessica Young:
@Johnny McKeon you mind sharing your numbers? I think I may run into an issue with self sufficiency

This is my third 4-Plex #pepper4plex I'm househacking.
(live in 1 unit, rent the other 3 out and live for free)

I used FHA owner-occupied loan with a 3.5% down-payment. closed 12/20/2021

asking price $575k
purchase price - $550,000
down-payment (3.5%) $19,250
30yr fixed rate mortgage
interest rate - 2.25%
seller concession $3,000
UFMIP $9,625k rolled into loan amt.

[expenses]

PITI (Principle,Interest,taxes, insurance )
$2,252 + $371.90 mortgage insurance
=$2,624
utilities (water, sewer, trash) varies
$270

[ potential Income ]
After remodel
rents $1,325 x 3 =$3,975
bill back utilities- $270

the best part is after a year I can
rent out all 4 units and repeat this process over with another 4-Plex.

House hacking is a great way to grow your rental portfolio with low down payment loans, live for free & increase your monthly cash flow. i have pics in my BP profile & I.g. account

How can you do that after a year? You can't have mulitple FHS loans so unless you somehow pay it off, you can't do it again?
0 Reply
Albert Bui
Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
4y
Quote from @Ben Hunt:

I'm looking at buying in an off market 4-Plex in Austin Texas using FHA financing where passing the self sufficiency test is iffy.
In my calculations, 75% of the total rent covers approximately 100% of the PITI. However, there is not much room for deviation here.
If the appraiser finds that the fair market rent is a bit less and the calculation then shows that 75% of the total rent covers 95% or 90% of the entire mortgage, is the whole financing deal a no-go?

Does the underwriter take into account my income or credit history as a factor for leniency on this rule?

Thanks and let me know,
Ben

The test immutable and has zero margin of error. With that said though there are ways to adjust rents, prepare for higher rents for the appraisers comps and is based on the appraisers opinion of market rents versus the PITIA or monthly payment (principal/interest/taxes/insurance/assessments).

You can work the upper end of the equation which is the income and fix up the units to get a higher opinion of rental values or you can work the denominator which is the expense side of the equation by:

- putting more money down (the worst solution of them all since it counters the whole thesis of why you're using FHA in the first place)
- you can buy down the rate on the 30 year
- you can switch to the 5/1 ARM FHA to get a lower rate and cheaper buy downs between rates (FHA underwriters qualify because on the note rate on FHA even with ARM's or adjustable rate mortgages)
- you can get a lower insurance quote
- you CANNOT mess with property taxes unless you know a politician locally (joking of course)

At the end of the day the FHA SS or self sufficiency rule only has a numerator or denominator and you can work all ends but there isnt much else to make sure you can get the maximum loan amount per fha guidelines.

A good investor and lender will be able to help you maximize both or prepare you in advance so that you dont deal with this stuff at the 11th hour (if you do you will be the best prepared you can possibly be prior to the application date).

Best of luck,

4 Reply
Albert Bui
Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
4y
Quote from @Roseann Scrivens:

@Johnny McKeon
Your potential rents of $3975*.75 = $2981

That is more than your PITI of $2624. So that property does meet the sustainability test, unless I'm missing something?

How does it work if there’s actual rents but potential rents are much higher? The place I’m looking at would meet the test if rents were at market rate.

Hi Roseann,
I've done many of these house hacks and some for myself, but mostly for clients.
There is some confusion that appraisers use the lowest of actual rents or market rents or opinions per the appraisal. This is true when calculating income to qualify for a property. However on FHA SS tests the underwriter will use the market rents on the appraisal so often times the market rents will be higher than your actual because if the rents were so good in the first place the seller might not sell right?
Finding the perfect property that is 3-4 units (when the FHA SS or self sufficiency rule applies) is almost an art these days because prices are high and when rates surged past the mid 2's it made the FHA SS test immeasurable tougher to achieve.
Hope that answers your question.
0 Reply
Anthony Salazar
Salt Lake City · Member since 2021 · 42 posts · 18 votes
4y
I was looking for a similar “creative solution” when I was trying to buy a triplex or 4plex in So Cal.. Curious to see if you find one.
I was never able to find a way and eventually shifted strategies. It was a lot easier to find a SFH with an ADU or a duplex with an non-permitted 3rd unit. My lender treated it as a duplex, not a triplex, even though it had a 3rd rentable space
0 Reply
Albert Bui
Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
4y
Quote from @Ben Hunt:

@Ryan Avila, I just read through as much of the official document as possible and didn't see this test directly.

In sections,6 Manual Underwriting of the Borrower, and 5 Underwriting the Borrower using the TOTAL mortgage scorecard, the only mention was that the total rental income would be calculated by PITI - 75% of appraised rents. If the value is a negative amount it would be counted against the borrowers' gross monthly income.

Where do you see in the official documents that it's a pass/fail rule?

https://www.hud.gov/sites/dfil...

HI Ben,
There are no exceptions to the SS or self sufficiency rule and 75% of market gross rents as determined by an appraiser has to be equal to or greater than the monthly PITIA payment.
If you're short in covering this RentsX75%-PITIA = 0 or greater then you'll have to buy down the rate to get the PITIA lower, get a lower insurance quote, or bring in more money down payment, or work with the appraiser to review rental comps to get that up (either or, or combination of all of the above).
0 Reply
Albert Bui
Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
4y
Quote from @Anthony Salazar:

I was looking for a similar “creative solution” when I was trying to buy a triplex or 4plex in So Cal.. Curious to see if you find one.
I was never able to find a way and eventually shifted strategies. It was a lot easier to find a SFH with an ADU or a duplex with an non-permitted 3rd unit. My lender treated it as a duplex, not a triplex, even though it had a 3rd rentable space

Correct Anthony, in expensive markets like south county/ OC its nearly impossible to use FHA on 3-4 unit properties. The self sufficiency rule only applies to 3-4 unit properties not 1-2 so duplexes and SFR's with ADU's dont need to pass this test.
The SS rule is just a test that needs to be met on 3-4 unit properties but its not the income calculation.
0 Reply
Albert Bui
Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
4y
Quote from @Johnny McKeon:

i was successful and purchased my 3rd
4-Plex December 2020 and used FHA 3.5% to house hack. my 4-Plex almost didn't pass the self sufficiency test.

Congrats Johnny, in 2020 it might have worked better but I bet these days its way harder since values shot up so much in maricopa county areas right?
I recall I was offered a 500k fourplex in 2020 that shot up to 750-825k now by 2022 and that would be tough given rents are now only 5000-5200 gross per month.
0 Reply
Henry Lazerow
Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
4y
It's pretty strict but as mentioned above a good agent usually can sway them by simply being friendly, on time to the appraisal and giving them a list of comps to make the deal work. Using a good mortgage lender who knows all the appraisers from repeat deals helps too.
0 Reply
Albert Bui
Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
4y
Quote from @Anthony Salazar:

I was looking for a similar “creative solution” when I was trying to buy a triplex or 4plex in So Cal.. Curious to see if you find one.
I was never able to find a way and eventually shifted strategies. It was a lot easier to find a SFH with an ADU or a duplex with an non-permitted 3rd unit. My lender treated it as a duplex, not a triplex, even though it had a 3rd rentable space

correct because it was not a legal 3 unit which would illicit that FHA guideline so this 2 units (legal classification) with 3rd rentable space (non conforming/non permitted) is a loophole around triggering that FHA SS guideline - self sufficiency test.
0 Reply
Murtuza Bengali
Member since 2022 · 16 posts · 5 votes
3y
Very helpful discussion - appreciate everyone's inputs.
We are just starting out looking at buying a 3/4 unit property in and around NYC using an FHA 5% down. But it looks like given the current market with high interests and high property values there is close to no way that the self sufficiency test would clear.
There's barely properties where you find are breaking even in this area and having 75% of rental income to cover PITI means the property has to already be deep in the money cash flowing already! Good luck finding those during this time - and if they do exist, why would anyone be selling it except for really personal reasons.
Might need to reconsider, shift strategies and just go in for a duplex of some sort
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