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Running FHA Self Sufficiency Numbers on 3 and 4 Unit Multi Family Properties

Running FHA Self Sufficiency Numbers on 3 and 4 Unit Multi Family Properties

Hi everyone, this is going to be a quick video on how to run an FHA self-sufficiency test for three and four-unit properties that you’re trying to get under contract for your buyers. This is a very important test to run ahead of time, especially in places like Boston or the greater suburbs of Boston because prices tend to be much higher. Some landlords haven’t caught up to market rents and so you have low rents and high prices, which as you’ll see as we go through this, can make the self-sufficiency test fail, which means a couple of important things.

One is that a buyer who was looking to put as low as 3.5% down on an FHA loan may have to bring a much larger down payment because the loan amount goes down. It’s much better to find that out ahead of time, or at least know that there’s a likelihood of it, before you’re getting something under contract and before you’re getting too far down the road with your loan process. A good FHA loan officer will help you through this right from the beginning but still as an advisor and an agent, you should be helping your FHA buyers understand what this is and how to calculate the numbers early on in the process.

So, here’s a form that I was able to get from Joe Galvin at Movement Mortgage. It’s very straightforward and you’re just going to plug in some numbers here and it’s going to spit out a rough estimate of if it passes or not. The ultimate say will come from the loan officer and the underwriter that you’re working with. Again, this form just gives you a rough idea of where you’re going to land.

So, I’m just going to grab the fill tool here.

I actually have an appraisal for a property that we’re going to use that Joe was able to send over for this demo. You may not have the appraisal yet if you’re pre-offer. And so, for some of these numbers, you’re going to have to use what the MLS listing has and or information you’re able to gather from the listing agent. So, the first data point we need is, “Enter the appraiser’s estimate of fair market rent from all units.” So, if you have the appraisal, as you can see on this form where we do, four unit property. You’ll see, “Market rent per month. $1400, $1400, $1400, $1400 for a total of $5,600. So, we’re going to go over and add $5,600 here. If you don’t have the appraisal yet… Again, if you’re pre-offer, you’re going to want to work on behalf of your clients and you’re going to want to try to estimate what you think market rent is. That’s a different video that we’ve run. You’re going to use rental comps. You’re going to use MLS and some other sites to identify what you think the monthly market rents are.

In this case, we’re just going to pull it straight from the appraisal. Then you’re going to multiply that by 25%. So, in this case, we’re going to take $5,600 times 0.25. That’s $1400. And then if you have the appraisal, you’re going to enter the annual estimate, which is basically the annual operating expenses in this line item here, which if we scroll down, you can actually see where they break it down. And you’ll see total operating expenses is $2,787. So, we’re going to enter that here. $2,787. We’re going to divide that out by 12 and that’s $232.

So, in this case, you can see it’s pretty clear. Sometimes these numbers are closer. In this example, you can see that line number one, the rents minus 25% is much higher. So, for line three, what you’re going to do is the greater of 25% of fair market rents, which is line one, or the appraisers monthly operating expenses, which is line two, but divide it up by 12. And what you’re going to do is you’re going to put the higher of the two. So, in this case, it’s $1,400. You’re going to take your total rental income, $5,600, and you’re going to minus line three, which is $1,400, for a net monthly income of $4,200.

Then what you’re going to do is you’re going to have to go out to a third party website. There’s plenty of them. FHA Loan Calculators is one that I use to estimate the total monthly payment, including FHA mortgage insurance, to put into line five. So, what we’ll do is we’ll go over to FHA Loan Calculator. Now, this property, I’ll show you right here. The list price was $685,000. So, for the sake of this demo, that’s what we will use. We’ll assume a 3.5% down payment. Loan term, 30 years. Keep the interest rate. Choose Massachusetts.

Again, you’re going to want to verify the estimated monthly property taxes and homeowners insurance but we’re going to leave the defaults for the demo. And you’re going to see the monthly payment is $4323. So, we’re going to go back to our form and we’re going to enter $4323. Then what we’re going to do is we’re going to say, “Now we’re calculating the total self-sufficiency rental income,” which is line 4, $4200, minus $4323, for a difference of negative $123. And then lastly, just to calculate our percentage, you’re going to take your full payment, $4323, and divide that out by the net monthly income, $4,200, and you’re going to get 103%. Anything over a hundred percent is a fail.

So, that means that the debt service, the payment, exceeds the net monthly income by 3%. Again, this tells you that you’re in the ballpark. This particular property is in the ballpark for 3.5% down payment, FHA loan, assuming nothing changes. What it does mean is that there is a small delta. So, you’re going to want to work with your loan officer or at least advise your buyers going into it. They may have to bring a larger down payment. Again, there’s so many variables that go into every transaction. It’s difficult to say for sure on this demo. But in order to cover this hundred dollars, you’re either going to need a reduction in sale price, therefore your mortgage payment goes down or if the purchase price stays the same, your loan amount might come down a little bit and therefore it might be a larger down payment. That’s why it’s not uncommon in the Boston area for FHA buyers to bring four, five, six or even 10% down, depending on the property. It’s very likely because it just didn’t pass self-sufficiency.

So, that’s how to do it quick and dirty. Again, there’s a lot of variables. We’ve seen appraiser numbers come in with operating expenses a lot higher than this. So, you have to always keep that in mind but if you’re helping a buyer, just explain what self-sufficiency is for three and four unit properties. Talk to them about this form. Run the numbers without the appraiser estimate. Just use line one, which is times the 25% factor. At least it gets you in the ballpark to tell you if you’re even close or not.

Hopefully this was helpful but feel free to reach out with any questions or clarification. And again, somebody like Joe at Movement Mortgage can help you and your buyers through this process, right from the get go. Thanks!

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