How is FHA’s self-sufficiency test worked out?
- Add up what an appraiser says each unit would rent for, your own unit included.
- Take off the appraiser’s estimate for vacancies and maintenance, or 25% if that is more.
- Compare what is left with the full monthly payment. If the rent covers it, the building passes.
On the sample, four units at $1,575 come to $6,300 a month. Less 25%, FHA counts $4,725. The full payment is $4,151, so the building passes with $574 to spare.
What does FHA count as the payment?
Principal and interest, property tax, insurance, FHA’s monthly mortgage insurance, and any association dues.
The sample puts 3.5% down, $17,465, on $499,000. FHA charges an upfront fee of 1.75% of the loan, which can be added to it, so the loan is $489,962 and principal and interest are $3,097 at 6.5% over 30 years. Tax and insurance add $833. The monthly mortgage insurance is about $221: 0.55% a year of the loan before the upfront fee.
The rule is in HUD’s Handbook 4000.1, and the mortgage insurance rates are in Mortgagee Letter 2023-05.
What can you do if a building fails?
The same fourplex at $1,300 a unit fails. FHA counts $3,900 against the same $4,151 payment, which leaves it $251 a month short. Three things would pass it:
- Higher market rent. It passes at $1,384 a unit.
- More money down. It passes with $51,178 down, 10.3% of the price.
- A lower price. It passes at $461,257 with 3.5% down.
Does a duplex take this test?
No. FHA applies it to three- and four-unit buildings only. Passing it does not replace the lender’s check of your own income and debts.