Buyer Beware: Don't use an FHA loan to buy a 4 plex in some markets.

FHA is a fantastic loan product for first time home buyers who have good credit but don't have a lot of money saved up. The buyer is able to put as little as 3.5% down to buy the home and they must agree to live there for at least 12 months.

Since many of my clients are investors, they often ask me if they can use an FHA to buy small multifamily properties. I quickly tell them "Not unless you want to fail sale". Let me explain why.

FHA Self Sufficiency Test

The FHA wants to know that a multi-unit property is self-sufficient. In other words, the total rent that you receive for the units you do not occupy must be equal to or greater than the mortgage payment. This means the total mortgage payment, which includes principal, interest, real estate taxes, and insurance. Additionally, lenders usually reduce the rent amounts by factoring in a vacancy rate and other expenses, leaving about 75% of the remaining rents as net rental income. If the mortgage is more than the net rent you could bring in, the property is not self-sufficient.

Portland 4 Plex Example

Let's say you find a great deal on a 4 plex in Portland for a meager $800,000. And the rents of that property are all a whopping $1,500 each unit. You plan to live in one unit, so the rental income is $4,500 on the remaining units. Now we apply the 25% lender reduction to those rents to account for vacancy and other expenses. Now you are left with $3,375 as the net rental income.

Let's see if that is enough to cover the principal, interest, taxes and insurance for this property to meet the self-sufficiency rule. After a 5% down payment, the monthly mortgage on $760,000 at 2.5% is already $3,002.92 ....that's just principal and interest. We still need to account for PMI, taxes, and insurance (which vary property to property). Even with minimal property taxes at $5,000 a year ($418 a month), we already failed the test. Do you see the problem for this test in Portland?

The Solution

Since I specialize in helping owner occupied buyer's into small multi-family properties, I had to find a solution! Umpqua bank, a local lender, offers a portfolio loan for owner occupants that allows for borrowers to put as little as 5% down! They do not require the self-sustainability test AND they allow the borrower to receive up to 3% back from the seller in a credit for closing costs and prepaid costs. Another amazing aspect to this loan is they allow you to pay the PMI in a single payment upfront at closing, which can be part of that 3% credit from the seller. This allows most of my client's to cash flow immediately on a 3-4 unit property with only 5% down out of pocket.

Reach out if you want to learn more by emailing me at [email protected] or calling me at (503) 567-4697.