Buying a 2–4 unit building with FHA
You can buy a 2- to 4-unit building with an FHA loan and 3.5% down if you live in one of the units. For 3- and 4-unit buildings, the deal also has to pass the self-sufficiency test, and that's where I see most of them fall apart.
What is the FHA self-sufficiency test?
It's a rule for 3- and 4-unit buildings: 75% of the total rent from all units, including the one you'll live in, has to cover your full monthly payment. That payment includes principal, interest, property taxes, insurance and FHA mortgage insurance.
Example numbers: four units that would rent for $1,400 each bring in $5,600 a month. 75% of that is $4,200. If your full monthly payment is more than $4,200, the building fails, no matter how strong your income is.
The test doesn't apply to 2-flats.
Why do so many buildings fail it?
I've had a lot of deals fail this test, and it's almost always the same story: the price is too high and the rents are too low. Owners who bought years ago and have good tenants often haven't raised rent, so the rents in place are well below today's market.
What can you do if a building fails?
- Negotiate the price down, which lowers the payment.
- Put more down, which also lowers the payment.
- Look at a conventional loan, which has no self-sufficiency test and allows as little as 5% down on 2–4 units you live in.
- Focus on 2-flats, where the test doesn't apply.
What about buildings that need work?
FHA appraisals flag repairs, and older buildings almost always have some. In my experience that usually means roof repairs unless the roof was recently done, outdated electrical and some old plumbing. If the repair list is long, a standard FHA loan may not close, and an FHA 203(k) renovation loan, which rolls repair costs into the mortgage, can be the fix.
What I check before you make an offer
- The self-sufficiency math on every 3- and 4-unit building.
- The current leases and rents against today's market.
- The village's rental license and point-of-sale inspection rules.
Call or text Daniel at 708-625-8788 to run the numbers on a building you're looking at.
