An FHA loan is a mortgage insured by the Federal Housing Administration. Backed by the Federal Housing Administration, an FHA loan may require a down payment as little as 3.5% for a credit score of 580 or higher versus the average 20% down payment required by bank mortgage loans.
An FHA loan is a very affordable way for first-time investors to buy a 3-to-4-unit property and occupy one of the units. In return for making a smaller down payment, you must pay mortgage insurance premiums which protect the lender should you default. As a first-time real estate investor, you must also pass the “FHA Self-Sufficiency Test” to be approved for an FHA loan.
An FHA loan is a very affordable way for first-time investors to buy a 3-to-4-unit property and also occupy one of the units.
When real estate investors ask our specialists at A and N Mortgage Services about an FHA mortgage loan for a 3-to-4-unit property, we educate them about the importance of the mortgage loan calculation as well as passing the FHA Self-Sufficiency Test to qualify.
FHA Self-Sufficiency Test Checklist
FHA guidelines for 3-to-4 units state that, regardless of occupancy, the property must be self-sufficient. This means that the maximum monthly mortgage payment is limited to 75% of the total rental income. This percentage must be at least enough to cover the mortgage payment known as PITI (Principal, Interest, Taxes, and Insurance).
- 1. Zoning – The property must be zoned for residential multi-unit use.
- 2. Market – The property appraiser must provide data on projected market rents. Although the loan amount can be higher for multi-units, we need to make sure that the loan calculation complies with the requirements of the FHA Self-Sufficiency Test.
- 3. Net Rental Income – This is the appraiser’s estimate of the fair market rent from all units including the unit chosen by the borrower for occupancy. The calculation for the FHA Self-Sufficiency Test takes the total rental income less the vacancy factor of 25% as determined by the jurisdictional Homeownership Center (HOC).
- 4. Loan Calculation –Calculating your mortgage loan correctly is very important, because it can affect the maximum mortgage amount that you will be allowed to finance.
- 5. Conditional Commitment — Always double-check your lender’s “Conditional Commitment” letter which states that a lender will offer the loan if certain conditions are fulfilled. Loans are always conditional in the early stages, but the conditions are cleared progressively as the loan moves through underwriting and processing.
- 6. Income and Ratio Guidelines – Keep in mind that the FHA Self-Sufficiency Test calculations are used only to determine the maximum monthly payment. As the borrower, you must still qualify based on income and ratio guidelines. Please note that the projected rent may only be considered as gross income for qualifying purposes and may not be used to offset the monthly mortgage payment.
It is extremely important to calculate your mortgage loan correctly, because it can affect the maximum mortgage amount you will be allowed to finance.
Underwriting Your FHA Mortgage Loan
“As underwriters,” said Neena L. Vlamis, president of A and N Mortgage Services, “we will consider the FHA Self-Sufficiency Test calculation—regardless of the appraised value–to determine that the property can carry itself if the owner-occupied borrower were to move out.”
Specifically, Vlamis added, if the borrower’s total monthly net rental income from all units multiplied by 75% is equal to $2000.00, the total monthly PITI payment cannot exceed this amount. The mortgage loan amount will have to be adjusted accordingly to achieve this regardless of the amount for which the borrowers have qualified. Additionally, A and N Mortgage Services will need to condition for a Comparable Rent Schedule and Operating Income Statement from the appraiser to complete your calculation.
FHA Self-Sufficiency Test Helps First-Time Buyers
Guaranteed by the Federal Housing Authority, FHA loans are available to help first-time investors buy 3-to-4-unit rental properties with an attractively low 3.5% down payment. Once borrowers pass the FHA Self-Sufficiency Test, the FHA approves the mortgage loan.
A and N Mortgage Services Inc, a mortgage broker in Chicago, IL provides you with high-quality home loan programs tailored to fit your unique situation with some of the most competitive rates in the nation. Whether you are a first-time homebuyer, relocating to a new job, or buying an investment property, our expert team will help you use your new mortgage as a smart financial tool.
