Issues with getting an FHA loan

Member since 2022 · 10 posts · 8 votes

I currently live in Massachusetts and own a 2 bed 2 bath 1300 SqFt condo in Boston. I'm trying to house hack a triplex in Boston as my next venture. On the bp podcast and pretty much all over social media, house hacking is portrayed as very simple to get an FHA loan at 3.5%.

For some reason the lenders I've spoke to are making it seem like that's not the case and I wouldn't qualify with some of the triplex's I'm looking to live in 1 unit and rent the other two units. I'm also looking to rent my south Boston unit as well that I'm currently living in when I can get into a triplex. I've researched all of the FHA guidelines like credit score, dti ratio, house quality, county FHA cost limits, etc and I'm good in all of those areas. Do you know why people are telling me the FHA wouldn't work in my case?

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Jay HurstBusiness Member

Lender · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes

Quote from @Stefan Demopoulos:

Hi Cassi,

Thanks for the quick reply! The specific place is in very good condition. The last convo I had with a lender said I won't get approved if I move from my currently condo 2 bed 2 bath 1300 sq ft into something smaller / downsize. Aka if the unit im moving into was say a 1 bed 1 bath and 700 sq ft. Have you heard of something like that?

Thanks!

@Stefan Demopoulos

The FHA self-sufficiency test for 3-4 units is almost impossible to pass with only 3.5% down with today's prices and interest rates. The test is that 75% of the total rent of the 3 units cover your total Prin/int/taxes/homeowners insurance/mortgage insurance. So, if the total rent as determined by an appraiser is 6000, you enture payment would need to be under 4500.

This does NOT apply to 2 unit which makes a 2 unit properties much easier to buy wityh a 3.5% min down payment.

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Cassi Justiz
Rental Property Investor · Edmond, OK · Member since 2017 · 1k+ posts · 1k+ votes
3y
One reason is that the FHA loan requires the home to meet certain criteria. Usually it's not anything major, but it can't be a "fixer upper." No peeling paint, windows must work, everything needs to be functional, etc. If that's not the case for the individual properties and you meet the other FHA criteria, it may be more about the market itself. In my area, multifamily homes are really competitive and most go into multiple offer situations if they are priced reasonably. So if you aren't offering cash or a conventional loan with excellent terms, you probably won't have a shot at it. So you theoretically *can* buy a multifamily using FHA financing, but it's not very likely.

Ask the lenders for specific reasons that they don't think FHA will work for your scenario. They can give you some great insights, but you need to ask them for details.
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Stefan Demopoulos
OP
Member since 2022 · 10 posts · 8 votes
3y
Hi Cassi,
Thanks for the quick reply! The specific place is in very good condition. The last convo I had with a lender said I won't get approved if I move from my currently condo 2 bed 2 bath 1300 sq ft into something smaller / downsize. Aka if the unit im moving into was say a 1 bed 1 bath and 700 sq ft. Have you heard of something like that?
Thanks!
1 Reply
Jay HurstBusiness Member
Lender · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes
3y
Quote from @Stefan Demopoulos:

Hi Cassi,
Thanks for the quick reply! The specific place is in very good condition. The last convo I had with a lender said I won't get approved if I move from my currently condo 2 bed 2 bath 1300 sq ft into something smaller / downsize. Aka if the unit im moving into was say a 1 bed 1 bath and 700 sq ft. Have you heard of something like that?
Thanks!

@Stefan Demopoulos

The FHA self-sufficiency test for 3-4 units is almost impossible to pass with only 3.5% down with today's prices and interest rates. The test is that 75% of the total rent of the 3 units cover your total Prin/int/taxes/homeowners insurance/mortgage insurance. So, if the total rent as determined by an appraiser is 6000, you enture payment would need to be under 4500.

This does NOT apply to 2 unit which makes a 2 unit properties much easier to buy wityh a 3.5% min down payment.
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Stefan Demopoulos
OP
Member since 2022 · 10 posts · 8 votes
3y
Jay, thank you, this makes a lot of sense. Appreciate the info.
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Kyle Spearin
Real Estate Agent · Boston, MA · Member since 2016 · 451 posts · 214 votes
3y
@Stefan Demopoulos, as Jay said, the self-sufficiency test is the reason it wouldn't likely work in this interest rate environment. With that said, have you considered using a 5% conventional-- it's not too much more money to bring to the table and affords you more flexibility.

Some lenders have also told me that I couldn't move from a condo (I'm in Dorchester) to a 3 family. Their underwriters put 2 and 2 together that you're trying to build a portfolio. That said, there are 100% lenders who will allow this with a letter explaining why you're moving (job, closer to family, etc.)
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Jay HurstBusiness Member
Lender · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes
3y
Quote from @Kyle Spearin:

@Stefan Demopoulos, as Jay said, the self-sufficiency test is the reason it wouldn't likely work in this interest rate environment. With that said, have you considered using a 5% conventional-- it's not too much more money to bring to the table and affords you more flexibility.

Some lenders have also told me that I couldn't move from a condo (I'm in Dorchester) to a 3 family. Their underwriters put 2 and 2 together that you're trying to build a portfolio. That said, there are 100% lenders who will allow this with a letter explaining why you're moving (job, closer to family, etc.)

For an owner pccupied 3-4 unit you have to put down 20% for Freddie Mac, and 25% with Fannie Mae. The only exception is your can put 5% down for a 3-4 unit IF you make under 80% of the Adjusted median income for the census track you are buying in. But, that is very tough with an income in that range to be able to qualify for a 3-4 unit in most markets outside of the upper midwest.
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Tanner PileBusiness Member
Real Estate Broker · Colorado Springs, CO · Member since 2019 · 389 posts · 326 votes
3y
@Stefan Demopoulos
If you purchase a duplex you can work around the self sufficiency test that 3-4 units have. I would also as your lenders what the exact reason is for you not being able to qualify and then see how you can resolve it. If they are not giving t=you the specific reason for not qualifying and are not trying to help find a way around it, then they are likely not a good lender.
You will be told no many times before finding the right deal. If you constantly keep trying to find your next deal and ways to purchase it, you will be successful.
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Ryan ThomsonBusiness Member
Real Estate Agent · Colorado Springs, CO · Member since 2018 · 1k+ posts · 1k+ votes
3y
@Stefan Demopoulos my guess is you are running into the self sufficiency test problem with FHA. This is also a challenge in Colorado Springs. With interest rates and prices both increasing most properties don't pass the self sufficiency test.
In order to pass the self-sufficiency test, you'll need to prove that 75% of the rental income you're likely to receive will exceed the full monthly mortgage payment. If not, you will have to put 15-20% down. FYI there is no self sufficiency test for a duplex.
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Caroline Gerardo
Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes
3y
Quote from @Jay Hurst:

Quote from @Kyle Spearin:

@Stefan Demopoulos, as Jay said, the self-sufficiency test is the reason it wouldn't likely work in this interest rate environment. With that said, have you considered using a 5% conventional-- it's not too much more money to bring to the table and affords you more flexibility.

Some lenders have also told me that I couldn't move from a condo (I'm in Dorchester) to a 3 family. Their underwriters put 2 and 2 together that you're trying to build a portfolio. That said, there are 100% lenders who will allow this with a letter explaining why you're moving (job, closer to family, etc.)

For an owner pccupied 3-4 unit you have to put down 20% for Freddie Mac, and 25% with Fannie Mae. The only exception is your can put 5% down for a 3-4 unit IF you make under 80% of the Adjusted median income for the census track you are buying in. But, that is very tough with an income in that range to be able to qualify for a 3-4 unit in most markets outside of the upper midwest.

Boston median income $81400 or under $6600 monthly which won't buy a duplex or triplex in Boston because the prices are soooo high.
Say you found a $1,200,000 3 unit and two of the units rent for $5000 less 25% haircut equals $3750 more income and your payment is $9985 Debt to income ratio is 96% (needs to be 43) assuming you have 20% down and no bills.
Look for a duplex it solves the problem.
You need a reasonable beyond a doubt letter maybe with backup why units are better for you than where you live. Things like you child's school location or you need to move Mom into other unit but she pays full rent or there is high garage for your dog washing trailer... AND You need a better lender who can explain every in and out.
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