What You Need To Know About Purchasing a 3 to 4 Unit Building Using FHA Financing

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Guidelines for Purchasing a 3-4 Unit Property with FHA Financing

Are you a first time homebuyer interested in purchasing a 3-4 unit property in Alameda? Good news, with FHA financing you can do just that with a 3.5% down payment! Following are some of the guidelines for qualifying for this financing:

For starters, the property has to be your primary residence- meaning that you must live in one of the units.

Three to four unit self-sufficiency test:

The maximum mortgage for three and four unit properties is limited, so that the ratio of the monthly mortgage payment, divided by the monthly net rental income does not exceed 100 percent, regardless of the occupancy status.

• The monthly mortgage payment calculation for three and four unit properties includes the following:

Principal, interest, taxes, insurance (Principle, Interest, Taxes, and Insurance – PITI), including monthly mortgage insurance, and homeowner association dues computed at the note rate, if applicable.

• Net rental income for three and four unit property is calculated using the following formula

⇒ the appraiser’s estimate of fair market rent from all units, including the unit the borrower chooses for occupancy, and

⇒ minus the greater of the appraiser’s estimate for vacancies, or

⇒ vacancy factor used by the jurisdictional HOC.

This net rental income calculation is used to determine the maximum loan amount.

In layman’s terms, the total rents must be the same or greater of the total monthly mortgage payment, to include taxes, homeowners insurance, and the mortgage insurance. These rents must be determined by an FHA certified appraiser- meaning that you can’t use rental leases for this specific test.

So here is the biggest problem with writing an offer on a 3-4 unit building using FHA…

You don’t know what the building qualifies for until you receive the appraisal. In speaking to a few account executives for mortgage banks regarding this issue we believe a good rule of thumb is to use the standard ratio for conventional rental income. That is 75% of the gross rents.

For example if a building grosses $400 take 75% of the income, $3000 and the Principal, Interest, Taxes, and Insurance must be no more than $3000. a month.

Borrowers must still qualify for the mortgage based on:

⇒ income

⇒ credit

⇒ cash to close, and

⇒ projected rents received from remaining units.

⇒ 3 months reserves of borrower own funds (cannot be a gift)

Projected rent may only be considered gross income for qualifying purposes. It cannot be used to offset the monthly mortgage payment.

You still need to also qualify with the normal debt-to-income ratios in regards to your income, in which you can use the rental income. But you can only use 75% of the rental income for the purpose of this qualification. As the primary borrower, you can’t use what you would pay for that unit as rent to offset your mortgage. All you are including in order to qualify is your monthly gross income.

Feel free to contact The Werdmuller Group for any questions on the housing and finance markets at info@garrick.biz or 510.282.5456.

Related Articles:

FHA vs Conventional Financing

http://the-buzzz.com/2011/03/02/fha-vs-conventional-mortgages-what%e2%80%99s-the-difference-when-buying-a-home-for-sale-in-alameda-berkeley-oakland/

What’s the Difference Between Getting Pre Qualified and Pre Approved for a Mortgage?

http://the-buzzz.com/2011/03/09/what-is-the-difference-between-getting-pre-qualified-and-pre-approved-for-a-mortgage/

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What You Need To Know About Purchasing a 3 to 4 Unit Building Using FHA Financing