Cincy quads: FHA 3.5% vs conventional 5% when self-sufficiency is the problem?

Question

Most of the east side quads I run don’t pass FHA self-sufficiency on paper, since it’s based on the appraiser’s rent numbers and not what I think I can get. For those of you who got one through, what made the difference? Seller credits for a rate buydown, appraisers coming in with higher rents than you expected, buying under list, or something else?

My lender originally suggested conventional 5% for both of our deals, and from what I understand conventional doesn’t have the self-sufficiency test. The extra 1.5% down hurts with only $40-50K between us, but it might open up way more properties. On your first 3-4 unit, did you go FHA or conventional, and would you make the same call again?

Amber Stout · Answer

A couple of things I'd add here!You could do a rate buy down, try to get lower insurance - there's a couple levers to pull. If you're far off, then conventional could be the way to go. I'd explore negotiating seller credits toward closing costs. While they can't cover your down payment directly, they can help preserve cash and offset some of that additional 1.5% you'd need for conventional.

I also like to underwrite these deals conservatively upfront, using realistic rents, taxes, insurance, and financing costs before my clients even make an offer. Saves everyone a lot of headaches.

One other strategy worth exploring is a single family home with an ADU. Depending on the property and zoning, it may qualify as a 1 unit property, potentially allowing as little as 3% down with conventional financing. Could be another way to house hack without tying up as much capital.

Lots of ways to approach this beyond just FHA vs. conventional!

Derek Brickley · Answer

Hey Benjamin!

Everyone covered the self sufficiency side really well, so I'll add something on the two deal plan. With $40 to 50K between you, the cash you keep after the first closing is what sets up the second one, so it's worth mapping out both purchases before picking a program instead of deciding deal by deal. Owner occupied financing expects you to live in the property for about a year, so the timing of who lives where and when you move into the next one matters as much as FHA vs conventional. Both of my househacks I did the 5% conventional route, and it opened up a lot more properties for me. Feel free to reach out, happy to go through those options with you if you'd like!

Ryan Baker · Answer

Benjamin, self-sufficiency is where a lot of quads die on FHA. The test uses 75% of the appraiser's market rent for all four units, including the one you live in, and that has to cover the full payment with taxes, insurance and MIP. So the things that actually move it are a lower price, lower taxes or insurance, or a rate buydown with seller credits. Buying under list usually helps more than anything else because it shrinks the whole payment. You can't really count on the appraiser coming in with higher rents.

Conventional at 5% down is a fair call when the numbers just don't pass. No self-sufficiency test, and the mortgage insurance can come off later, which FHA usually doesn't do. The extra down payment hurts, but it might beat chasing quads that never qualify. Just make sure you both keep enough in reserves after closing.

Happy to run both options on a real property with you and your brother. Give me a call, my number's in my signature below.

– Ryan

Noah Laker · Answer

Go conventional if you can stretch the extra 1.5% down. No self-sufficiency test, and PMI can drop off once you hit 20% equity, while FHA MIP under 10% down sticks for the life of the loan. The differrence is usually which quads you can even buy, not just the payment. Run both options on the same quad with real taxes and insurance before you offer. Hope this helps.

Devin Peterson · Answer

Benjamin, the self-sufficiency test knocks out a lot of 3-4 unit FHA deals, so you're not alone. On FHA, roughly 75% of the appraiser's market rent for all the units (including the one you'll live in) has to cover the full PITI, and the appraiser's rent number usually comes in more conservative than the listing pro forma. Run that test yourself before you offer, using conservative rents and real tax and insurance quotes, and ask your lender to look at rent comps early so the appraisal isn't the first time you find out.

Conventional is worth a serious look here. Fannie Mae allows 5% down on owner-occupied 2-4 unit purchases, and there's no self-sufficiency test. Instead the lender counts a portion of the rent from the other units toward your income for DTI, and you should expect a reserve requirement. Conventional mortgage insurance can also come off once you build enough equity, while FHA MIP with under 10% down stays for the life of the loan unless you refinance. The tradeoffs are that conventional pricing is more credit sensitive and the extra 1.5% down adds up on a quad.

With $40-50k between you and your partner, I'd have a lender run both options side by side on an actual property, including closing costs and reserves, before you commit to one path.

Gregory Acs · Answer

The biggest difference is that conventional financing doesn't have FHA's specific self-sufficiency test for 3–4 unit properties, so it can open up more options. However, I'd compare the full cash-to-close and monthly payment rather than just the 3.5% versus 5% down payment. Seller credits may help with closing costs or a rate buydown, but they won't necessarily solve the FHA self-sufficiency issue. Also, make sure your lender has confirmed the 5% conventional option for the specific property and occupancy situation. What price range are you looking at for these quads?

Henry Lazerow · Answer

I went conventional 5% down on my 4 unit house hack and so do nearly all of my clients. The 5% down conventional is an amazing program! Sellers know FHA has many risks such as lower credit financially weaker buyers, self sufficiency rule, lender repairs, etc. Not sure how hot your market is but especially if dealing with multiple offers its important to have your offer Conventional to look strong. On the listing side, I always advise sellers of the risks of each offer not just the price on the offer.

Amber Stout · Answer

It's a zoning thing so I would go on your appraisers website for the county when you find a property you like to see if it's single + adu or if you're working with an agent just tell them you want a single fam + ADU and it needs to be zoned that way. Shoot me a DM if you want to walk through it!

Aaron Zimmerman · Answer

Back in 2019, I was able to get self sufficiency with having a higher down payment, seller credits, lower coverage on insurance. I didn’t buy down the rate

Aaron Zimmerman · Answer

Honestly with today’s rates, it’s going to be super challenging getting anything to work self sufficiency wise. I’d personally favor 5% conventional if you can do it

Cincy quads: FHA 3.5% vs conventional 5% when self-sufficiency is the problem?

Cincy quads: FHA 3.5% vs conventional 5% when self-sufficiency is the problem?

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