4 plex lending standards

5 Replies

I recently talked to a mortgage broker, I'm selling my single family house and looking to buy a 4 plex.

I was kind of surprised to find out that fha or va Loans won’t even lend to you if 3 out of the 4 units don’t cash flow or equal to the mortgage amount.

I’ll be living in one unit. So I’m confused on why they will led me money on a single family home with a $1900 mortgage where I have no one but myself paying the mortgage.

Example-

650,000 4 plex

Unit 1-$1000

Unit 2-$1000

Unit 3-$1000

Unit-4 id live in

Mortgage is $3400 a month.

My income will way more then cover the difference from the loss of rent vs the mortgage.

They will not let me give me a loan on this property because the 3 units don’t cash flow or equal the mortgage.

So I'm curious if I need to speak with another lender or is this the basic rule that I completely missed?? I've just never heard of this standard.

Talk to more banks, but at the end of the day, they need to ensure that either you have the DTI to handle the 4 plex mortgage or the property is already leased up and the rents cover it. Doesn't seem strange to me.

@Patrick Flanagan

Yup.. fha has a rule about the rental from the other units has to provide a certain amount of cash flow. Can’t remember the exact terms...

If you are that well off financially, what about just doing a conventional loan... there isnt anything "magical" about the fha loan.

The FHA or VA would probably be a better bet... Especially the VA because no PMI, lower rates, and much more flexibility with the DTI. As long as you have the residual income, you can exceed the DTI. The only thing is that to use the anticipated rental income to qualify, you have to have a history of receiving rental income so you can pretty much prove to the bank you won't crash and burn and default.

Do you have rental/landlording experience?

FHA also has self-sufficiency test.. The will use the formula total # of units - 1 x .75 for the subject property rental income. You will need to show that your personal income can fully satisfy the obligation with the corresponding DTI guidelines the lender has.

@Patrick Flanagan It sounds like this won't pass the self-sufficiency test. In the event you default, 75% of the rents need to cover the mortgage. This is 100% of rents from all 4 units, less a 25% vacancy factor. In your case since all units rent for $1000 it works out the same either way ($1000 x 4) - 25% = $3000, or $1000 x 3 = $3000, but if you have units that would rent for different amounts, you need to use the first formula to figure out whether it meets the test. Can you offer less, put more money down, and/or buy down the interest rate to where the payment is lower than $3000/month?