How strict is the FHA Self Sufficiency test?

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How strict is the FHA Self Sufficiency test?

Ben Hunt
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
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,

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

    @Murtuza Bengali you are right. As prices and rates have risen, it's gotten tougher to find a 3-4 unit house hack using FHA.

    @Ryan Avila you can use rent from the unit you will be occupying to help pass the self-sufficiency test.

    Here's a handy FHA self-sufficiency calculator with a simple pass/fail result if you want to run numbers or figure out how to get a property to pass the test putting more down, getting a lower rate, etc: https://thisismortgage.com/fha-self-sufficiency-test-calculator/

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  • Ryan Avila
    Rental Property Investor · Napa, CA · Member since 2016 · 69 posts · 75 votes
    3y

    @Tim Lucas I never said you couldn't use the rents from the unit you choose to occupy. Of the projected rental income, which is included in the small multi-family appraisal, 75% of the rental income must cover 100% of PITI.

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  • Ryan Avila
    Rental Property Investor · Napa, CA · Member since 2016 · 69 posts · 75 votes
    3y

    @Tim Lucas

    I had to go back and read the FHA sale-sufficiency test rules, because it's been a while. My original comment was correct, you can not use the owner occupied unit as rental income towards the 75% rental income that needs to cover 100% of PITI.

    From FHA, "For qualifying purposes, projected rents (of rental units only, not the owner occupied unit(s)) may be considered as part of the borrower's gross qualifying income only after deducting the appropriate HOC vacancy and maintenance factor. Rental income may not be used as a direct "offset" to the mortgage payments."

    Have you been through a self sufficiency test? I was not able to close on a loan due to this issue, so I have personally dealt with this before. 

    I know know a way around this for some people, but I didn’t at the time and lost the deal due to not meeting self sufficiency. 

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

    @Ryan Avila There are 2 totally separate topics here.

    1. Eligibility
    2. Qualification

    1. Eligibility: For a 3-4 unit to be 'eligible' for FHA, it must pass the FHA self-sufficiency test. For 'eligibility' you can use the owner-occupied unit's rental income to try to meet the self-sufficiency requirements. A property might be 'eligible' even if the applicant does not qualify. This FHA self-sufficiency calculator estimates whether a property is 'eligible'.

    2. Qualification: means your DTI, credit, etc. meet FHA guidelines, ie the lender believes you can repay the loan. For 'qualification' you can NOT use projected rent from the owner-occupied unit since you'll be living there.

    The self-sufficiency test tells HUD they can at least break even on the PITI if they have to foreclose. If they foreclose, you're not there anymore, so they can rent out ALL units. But you're right, this has nothing to do with #2 'qualification'. The owner-occupied unit can't help you meet DTI.

    See https://answers.hud.gov/FHA/s/...

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  • Roe Wilkins
    New to Real Estate · Austin, TX · Member since 2020 · 1 post · 0 votes
    3y

    For the self sufficiency test, does anyone know whether the appraiser will consider market rents with a construction value add plan or if they will simply look at the market rents on an as-is condition? 

    Eg: Market Rent = $1,400
    Pro Forma [RENOVATED] Rents = $1,600
    Difference = $200

    For a 4-unit with the above assumptions, looking at renovated rents opposed to as is rents would add $800 / month to the numerator. 

    Attempting to buy close to Austin with current interest rates makes this a big factor in purchase price for the FHA loan. Thanks in advance.

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  • Steve SchulmanBusiness Member
    Real Estate Agent · Jersey City, NJ · Member since 2019 · 72 posts · 49 votes
    3y

    Depends on the lending institution, though the short answer is these banks are strict. Think about it, and it's purpose. Most "first-time" buyers are going from NEVER owning real estate to controlling and operating 3-4 units. I'd say it's likely they bite off more than they can chew and drop the ball IF the the bank didn't set guidelines rather "regulate" these loans insured by the Federal Housing Administration (FHA). Remember, there's an investor on the other side of your loan, who's taking on the risk. Hence, the bank throws what's basically a 25% vacancy rate on the building.

    That said, I have preferred lenders I use with some "pull" albeit it has to be with reason. I also know lenders who have appraisers in their pocket and can get the rents needed to pass the FHA self sufficiency. 'Tis the relationship business of real estate. I've come across these Robin Hood-like loan officer's from being an investors agent in the business, but also from scouring the MLS and seeing 3-4Family homes in "high-cost" areas that closed with an FHA (not FHA 203k) loan-- then reaching out to see what gives?

    [email protected]732-439-4364
    The Schulman Group | Compass · VIP Team568 Reviews
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  • Steve SchulmanBusiness Member
    Real Estate Agent · Jersey City, NJ · Member since 2019 · 72 posts · 49 votes
    3y

    @Roe Wilkins FHA 203k loan is your best bet. To answer your question, the bank will look at ARV rents and will be a lot more conservative thereof. I've closed multiple FHA 203(k) loans with clients and have utilized one myself, and a handful were on 3-4Families. That being said, it's a lot tougher these days, in my north Jersey market at least, to make it work.

    [email protected]732-439-4364
    The Schulman Group | Compass · VIP Team568 Reviews
    WebsiteView Page
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