FHA Self Sufficiency Test
BP Community,
There is a Multi-family (4-plex) that I am interested in purchasing. Currently all 4 units are 1 BD 1 BATH Units and with the current market rents for 1 BD 1 BATH..... The property doesn't pass the FHA Self Sufficiency Test. I plan on getting a 203K Loan to perform a major re-model on all 4 units and eventually convert them to 2 Bed & 1 or 2 Bath. Can the appraiser appointed by the FHA Lender assess the rental income based on the units post renovation. Comparable market rents for 2 Bed 1 Bath Units allow the property to pass the FHA Self Sufficiency Test ? I am not familiar with how a 203K loan on top of an FHA loan comes into play. Just trying to make it work, so I would appreciate any support.
Does the same also apply for an owner-occupied convectional loan ?
Thanks BP!
I would think logically that the appraiser can complete the rent analysis "as completed". For a 203k loan, the appraiser completes the appraisal "as completed". The question is whether they will do the rent estimate portion of the appraisal "as completed" as well. I would assume so, but it's best to check with the lender to see how they interpret official FHA guidelines which read:
"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."
The question is what FHA means by "Appraiser's estimate of fair market rent." If I were a lender, I would say it means "as completed" fair market rent because how could you rent out units in their "before completed" state? I'm now also curious as to how lenders interpret FHA self sufficiency rules for 203k.
Here's an FHA self-sufficiency test calculator once you have the future rent amounts dialed in. https://thisismortgage.com/fha-self-sufficiency-test-calculator/
Hey @Maen Abu Khater,
This is one of the biggest hurdles going fha on 3-4 units. From what I’ve run across, they will take the current rents of each unit. If the units are vacant, they will take marker rent. So having the units vacant is a huge help for owner occupied buyers. I don’t think they can adjust for 2/1 if it is not currently a 2/1 because now the appraiser is basically increasing the value of a property based off of what it could be, almost a pro forma, rather than how it currently operates today, “as-is”. And a lender does not lend off of potentials, eventually, someday, they lend on as-is. So chances are, no, they will not go off of 2/1 rents if it is only a 1/1.
The self-sufficiency test is only for FHA though, you can go conventional owner occupied and not have to go through that hurdle. However, you'll need +20% down to purchase. There are some nonowner occupied products that you can do less than 20% (some close to 10%) but they're few and far between
No the appraiser is doing a 1007 market survey based on long term rents as of the day he saw the subject property.
There now are conventional products without the FHA self sufficiency test with 5% down. However the High Balance conventional loan is not as high as the FHA loan amount.
Know the market rents. Have a written hazard insurance quote on day one.