I was recently in escrow to purchase a fourplex via FHA but fell out because the property didn't meet the self sufficiency ratio. The underwriter calculated the self sufficiency ratio by taking 85% of the gross income from 3 units instead of 4. However when I read the rules, the underwriter should be taking income from all 4 units in this calculation. Did the rules change or am I missing something? I would like to be contacted with a mortgage broker that regularly funds triplexes and fourplexes FHA since there have been many instances where my current mortgage broker isn't as familiar with the rules in this arena.
Brad, I have a background in mortgage financing, but I'm not an expert on this particular rule. However, I suspect what is going on is that they will only qualify under the self-sufficiency rule with 3 of the 4 units because FHA assumes you're going to be living in the fourth unit. FHA doesn't do investment property loans, they only do owner-occupied financing, so you have to live in the fourth unit. Because of that, it doesn't make sense to calculate self-sufficiency based on rent from all four units.
There's two rules that come into play when buying a four-unit property with FHA financing:
- 1) Self-sufficiency - FHA wants to make sure the property generates enough income to cover the mortgage in case you stop paying. Fourplexes are riskier from a lending standpoint, so that's why the self-sufficiency rule is there.
- 2) Debt-to-income (DTI) - FHA also wants to you qualify "normally" using the standard debt-to-income rules. In other words, you need to have enough qualifying income coming in to pay your regular debts plus the mortgage payment (including taxes, insurance, and mortgage insurance).
To buy a four-unit property with FHA financing, you have to meet both qualifying standards.
@Bradley Johnson See above.
Thank you for the question and the answer. This is exactly what I plan on doing in the next month or so.
Please update us with any new findings you come across during this process.
Ok thanks Mark. I purchased a fourplex in 2013 via FHA and later refinanced into a conventional loan and I was looking to repeat that exercise however it seems like the underwriters on now interpreting the FHA guidelines how you are describing them. I'll have to figure out another way to purchase my next fourplex.
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