What is the FHA Self-Sufficiency Test and Why Does it Matter to Me?

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If you’re considering buying a three or four-unit property, using FHA, the Self-Sufficiency Test is something you need to know about.

According to the Department of Housing and Urban Development (HUD):

The maximum mortgage amount for three and four unit properties is limited

so that the ratio of the monthly mortgage payment divided by the monthly net

rental income does not exceed 100%, regardless of the occupancy status.

The monthly mortgage payment calculation for three and four unit properties


  • · Principal, Interest, Taxes, and Insurance (PITI), including

           – monthly mortgage insurance, and

           – hazard insurance, and

  • · homeowners’ association (HOA) dues computed at the note rate, if


Net rental income is used to determine the maximum loan amount for three

and four unit properties, as described in HUD 4155.1 2.B.4.a. Net rental

income is calculated by

  • · using the appraiser’s estimate of fair market rent from all units, including

the unit the borrower chooses for occupancy, and

  • · subtracting the greater of the

           – appraiser’s estimate for vacancies, or

           – vacancy factor used by the jurisdictional Homeownership Center (HOC).

Why does HUD have this rule?

FHA loans can only be used to buy owner-occupied homes.  However, after a certain period, you can move out of the home and rent it out.  Due the very high likelihood of multi-unit properties being converted into rentals, FHA has this test in place to make sure the property can “stand on its own feet.”

So what does all of this mean?

FHA requires as little as 3.5% down, which can make it a very affordable way to buy a home without a large down payment.  It can also be a great way to enter the world of real estate investing, by buying a multi-unit property, and receiving rental income to supplement, or even pay for your housing expenses.  When buying a three or four-unit property, the loan must pass the self-sufficiency test to be approved.

In a nutshell, when buying a 3-unit or 4-unit home, the appraiser’s estimate of fair market rents from all units (known as a rental survey) will be used for this very important test.  The rental survey will estimate what market rents are for all of the units of the property, even though you will be occupying one of them.  That total number is then multiplied by the vacancy factor (currently 15%), and the result is subtracted from the total to give the maximum allowable payment.

For example, assume that you are buying a four-unit home.  If the rental survey determines that the units would rent for $1000 each, you have $4000 in rents.  Multiplied by 15%, you have $600, and subtracting that from the rents leaves you with $3400.  This means that your total payment (Principal, Interest, Taxes, Insurance, Mortgage Insurance, HOA Dues – if applicable) cannot be higher than $3400.  If the payment is higher, the loan amount must be reduced or the interest rate lowered to get the payment below this number.

This test rarely becomes an issue and many buyers, Realtors, and loan officers aren’t even aware of it, for four-unit properties, as the rents are generally enough to pass the test.  Three-unit properties are usually where we run into issues, as having one less unit bringing in rental income makes the difference.

As a buyer, knowing the ins and outs of this rule can help you to understand if a property will be the right fit for you, and if you’ll be able to qualify.

As a Realtor, it is important to understand if your buyer will qualify, or to make sure your seller doesn’t accept an offer that will not be able to close.  Due to the lack of general knowledge of this rule, it is often days or even weeks into an escrow period before it becomes an issue, when the file is in underwriting.  This can cause headaches after the expense of an appraisal, and many days lost in the sales process, as well as frustrated clients, agents, and an embarrassed lender.

In general, your knowledge of this rule makes you a better, and more informed agent, client, or lender.

If you have questions, or would like more information regarding this rule, or would like to see future posts about any other topics, please call or email me any time.


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A Little Thinspiration

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A Little Thinspiration

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Fantastic Testimonials by Satisfied Clients

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Fantastic Testimonials by Satisfied Clients

Happy Friday Everybody! I wish everyone had a fun-filled 4th of July Celebration. Check out this new testimonial written by my most recent client – seeing fantastic testimonials such as this makes Mortgage Advising that much more enjoyable. You can also see it at: http://www.alpinemc.com/robertfair .

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