FHA self-sufficiency test on a triplex is wrecking my sequencing plan

Question

Small multifamily is where I actually want to end up, so the plan was to run the live-in-then-rent chain through 2 to 4 unit buildings instead of houses. One building a year, live in a unit, then rent the whole thing out and move to the next.

The triplex I'm underwriting: $480,000, 3.5 percent down, PITI plus MIP lands around $3,400 with escrows. Appraiser-equivalent market rents look like $1,500 a unit, so $4,500 total, times 0.75 is $3,375. That's $25 short of the payment. On a self-sufficiency test that fails, and a $25 miss is not something I can argue my way out of.

Questions. Does the test look at all three units or only the two I'm not living in? Does the appraiser's number override my rent comps if mine are higher? And if the answer is that 3 to 4 units are effectively off the table at this price level, is dropping to duplexes the fix, or do I stop using owner-occupant programs and go conventional with more down?

Rena Expert · Accepted Answer

Take the pieces in order. The self-sufficiency requirement on FHA applies to 3 and 4 unit properties, and the arithmetic is the one you already ran: appraiser-determined market rent for the units, 75 percent of it, compared against the full monthly mortgage payment including principal, interest, taxes, insurance and mortgage insurance. Confirm the current text with your lender in writing, because program handbooks get revised and lenders sometimes apply a stricter version.

On whose rents count, the calculation is built from the appraiser's rent schedule on the 1025 form for the property, and your own comps are input to that conversation at best. If the appraiser writes $1,500, the lender uses $1,500. You can support a higher number with signed leases and real comparable listings before the appraisal happens, and that's the only leverage point you have. After the report is issued you're mostly stuck.

Duplexes generally sit outside the self-sufficiency test, which is why a lot of people who want small multifamily run the chain through 2 units. That's a real fix rather than a workaround.

What you haven't raised is the second-order problem. Your $25 miss is a symptom of buying a building where 75 percent of gross rent barely covers debt service at 3.5 percent down. When you move out and try to qualify for building two, that same thin spread is what a lender nets against your DTI, and the vacancy factor will make this property a drag rather than an offset. You'd be repeating the tightest possible version of the deal. Run the ratio for property two before you decide the triplex is the problem, and also price the water and heat structure, since master-metered utilities on older triplexes eat the margin you're calling break even.

tashaford30 · Answer

The duplex route reads as less fragile to me for exactly the reason in that last paragraph. Two units at $1,500 with a smaller payment leaves room for the appraiser to come in low without the file dying.

One thing I've been trying to pin down for my own first purchase: on FHA the annual mortgage insurance can run for the life of the loan depending on the down payment, so if you're stacking these and holding them long, you're carrying that premium on every property in the chain forever unless you refinance. Cairn, does your $3,400 assume MIP stays in the payment for 30 years?

FHA self-sufficiency test on a triplex is wrecking my sequencing plan

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