FHA Self Sufficiency Test

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Everyone wants to buy a multifamily these days. And for good reason. Real estate is a proven asset class that promises generational wealth.

Moreover, lenders will actually qualify you for a bigger loan if you buy a multifamily, vs a single family home. Mortgage lenders will take into account the rental income that you will generate, and count 75% of this income towards your income.

In other words, the rental income generated will improve your Debt to income ratio, which is the ratio lenders use to help determine your loan amount.

And the best part, you only need a downpayment of 3.5% with an FHA loan.

But the devil is in the details, and the FHA Self Sufficiency Test, which only applies to a multifamily with either 3 or 4 units (apartments) is something that trips most people up.

Conforming Loan Limits

You will have different conforming loan limits depending on how many units(apartments) the property you’re looking for has.

The conforming loan limit is basically the maximum loan amount a lender will loan you. If you want a loan above this limit, you will need to apply for a jumbo loan and put down at least 20%.

picture of multifamilies generating income

In high costs areas like New York City, the conforming loan limits for 2023 are as follows:

  • Single Family Home – $1,089,000
  • Two Family Home (Duplex) – $1,394,775
  • Three Family Home (Triplex) – $1,685,850
  • Four Family Home (Quad) – $2,095,200

$2MM!!! Now, before you get too excited about being able to get an FHA loan for that amount, consider a couple of things.

FHA Self Sufficiency Test – FHA Rule 75

If you’re buying either a single family home, or a multifamily home, then this test does not apply. You can secure a loan for the max conforming loan limit, $1.394M in NYC, and cover the rest of the purchase price with a 3.5% down payment.

But if you’re purchasing a 3-4 unit multifamily, then FHA guidelines state that the 75% of the rental income must exceed the monthly mortgage in order for the building to be self sufficient.

You will have to figure out what the monthly mortgage is based on the Principal, Interest, Taxes and Homeowners Insurance (P.I.T.I)

Next, you will have to determine the market rate rents that can or are already being charge for each apartment, including the one you intend on living in.

The total of these rents multiplied by 75% must be greater than your monthly mortgage payment. 75% was chosen to account for vacancy rates.

In an era where the 1% rule barely applies in most major cities, this is a really high bar. Moreover, higher interest rates make it even more challenging to meet this rule.

picture of income producing multi family properties

The Math on the FHA Self Sufficiency Test

Here’s a simple and somewhat unrealistic example

Monthly Mortgage (P.I.T.I) = $4,500

  • Rent from Unit 1 = $1000
  • Rent from Unit 2 = $1000
  • Rent from Unit 3 = $1000
  • Rent from Unit 4 = $1500

Total Rental Income to qualify = $4,500 x 75% = $3,375

Since $3,375 is less than $4,500, this loan will not work. This deal will get denied by FHA underwriters.

Oh, and don’t try to come up with inflated rent numbers, because the FHA appraiser will essentially go with the prevailing market rate rents, even if you have a lease with tenants who are paying double the market rate rents.

Spend Time Finding a Great Deal or stick to Duplexes

Our advice, stick to buying duplexes for now. Unless either interest rates go way down, or rents go way up, it’s going to be tough to make the numbers work for a 3-4 multifamily unless you find a really really good deal.

Alternatively, you could have a higher down payment, which will reduce your loan amount. But if you’re making a large downpayment, why use an FHA loan to begin with?