My fourplex keeps failing something the lender calls a self-sufficiency test

First time trying this so bear with me. I found a fourplex at 519k, four two-bedroom units, currently rented at 1,100, 1,125, 1,100 and 1,050. I was going to do FHA at 3.5 percent down, live in one, rent three.

My loan officer says the file fails the self-sufficiency test. From what she explained, on three and four unit FHA purchases they take the appraiser's market rent for all the units, cut it by 25 percent for vacancy, and that number has to cover the whole mortgage payment including taxes and insurance. She has to confirm the exact treatment with underwriting but that's the shape of it.

So the appraiser's rent schedule came back at 1,150 a unit, 4,600 total. Take 25 percent off and you're at 3,450. My payment with the mortgage insurance comes to about 3,880. Short by 430 a month.

Things I've thought of. Put more down, which I've run and it takes about 55k extra to close the gap and I have 24k. Find a cheaper fourplex, but everything under 460k in this area is either gutted or an hour out. Buy a duplex instead, since she said the test doesn't apply to one and two unit properties, and a duplex here runs 340 to 380 with one side at 1,200.

What I don't get is why the rule exists in a form where three occupied units at real signed leases doesn't count for anything. The appraiser's number is lower than two of my actual leases. Is there a way to challenge the rent schedule, or am I supposed to just take the duplex and move on.

5 replies

1bmoreno23AB1B

I asked about this exact thing two months ago because I was staring at a triplex. The way it was explained to me is the test is about whether the building can carry itself if you leave, not whether you can afford it. Which is a different question from the one you'd ask yourself. Doesn't make your 430 gap go away though.

1marcus_hale41CG4A

Before you fight for the fourplex, price the insurance and the taxes at the new assessed value. A 519k purchase in a lot of counties resets the assessment and your 3,880 might be a 4,050 by year two, which puts you further under the line rather than closer to it. I'd want the actual reassessment rule for that county in writing before spending another week on this deal.

-1aaron_fitz10 Get yoursPRO6

Honest read on the duplex option, it's the same strategy with less of everything. 380k duplex, live in one side, 1,200 in from the other. Your payment lands maybe 2,650 and you're out of pocket 1,450. That's worse per door than the fourplex would have been and it's also a deal you can actually close. I went back and forth on this for four months and the fourplex I was chasing sold to someone with 200k down.

2wendy_park48CapitalPRO7

Read the appraiser's rent schedule itself, not the summary number. It lists the comparable rentals used, with addresses and adjustments. If they pulled three one-bedrooms from a rougher pocket a mile away and adjusted them up, that's a specific, arguable error and it's what a reconsideration request needs to point at. If they pulled four legitimate two-bedroom comps in your census tract, 1,150 is the number and you should stop spending money on this one.

My fourplex keeps failing something the lender calls a self-sufficiency test

5 replies